Tumbling Stocks and Interest Rates Starting to Drag Down Preferreds

So with another day of tumbling stock markets and concurrently falling interest rates we are finally starting to see a bit of a bite into preferreds and baby bonds.

The average price of a $25/share issue is off 12 cents this week thus far. This is just the overall negative sentiment starting to move even the income market a bit lower–nothing dramatic.

Obviously newer investors ask–with falling interest rates why are preferreds and baby bonds falling? In our opinion it is simple the negative sentiment overwhelming the logic of lower interest rates. Interest rates in general are only 1 piece of the pricing puzzle for these securities–and over a short period of time–a week or month–sentiment can easily overwhelm interest rates.

It will be interesting to see the outcome of the Chinese trade talks. I would bet a dollar that the tariffs scheduled to kick in tonight will be postponed because of “progress” in talks. If this happens both rates and stock markets will turn and head sharply higher.

37 thoughts on “Tumbling Stocks and Interest Rates Starting to Drag Down Preferreds”

    1. Nomad, all isnt lost though. They only had to issue 287,000 more LTS-A preferreds to market this quarter….Probably to pay the other LTS-A shareholders their dividends as usual. :)…Their printing press is running overheated almost as much as US Govt’s. 🙂

      1. Grid, that’s just under another whopping $7.2! million at 8% yield that LTS is on the hook for. They have no way of ever paying down this hematoma of a festering monthly preferred… the noose is tightening. What happens when the economy turns down?
        Smile my friends, Nomad

        1. Nomad, usually a company is something to buy or sell, or just avoid. But with LTS, I am not rational, as I just hate it. They yack about stock buy backs and yet every year they have more outstanding. They treat the preferred like a printing press. It almost represents 50% of their capital. They never make enough profits to pay for the divi. They underwrite peon dirtbag outfits to market the big boys ignore. Their salesforce is probably fee soakers like Ed Jones, etc….
          I dont understand my passionate hatred for this company, but at least I am cognizant of it and admit it, lol.

          1. Grid, somehow you and I have done our part to warn the nescient investing populous of the risks involved. I have looked into the soul of this investment horrid beast and ran as fast as my legs will take me away. I actually owned this demented preferred back when it IPO’s in 2013 for a few years. When I saw what management had in mind (creating an 8% festering paying piggy bank) I sold and still watch in amazement that LTS continues to issue 8% debt in the lowest rate environment we have had a many many decades.
            Pure gold does not rust. Only gold alloys do so. You may have golden dreams. But if you go in the company of toxic people, you become “a gold alloy” and what that means is that you can rust at any time! Nomad

      2. Common shares were up 65% YTD going into earnings…if its a Ponzi scheme, then its a good one.

        1. CW, you may be correct that this is a good stock. I actually appreciate people taking the other side to balance debate out. And I appreciate you being good natured about it also like you are.
          Although I do get a kick out of one curmudgeon who posts here with his digs. Makes me laugh, that funny guy he is!

        2. Citadel, I appreciate your post and as Grid stated, know I too like both sides of a financial debate. I welcome ALL who would like to discuss LTS and would certainly not shut anyone’s perspective out just because they observed a different finding. I hope we are all adults here, desire to help each other and never try and hurt anyone’s feeling because ones analysis stepped on others portfolios tenderness and sentiment.
          LTS has a tiny market cap of $520MM and a disaster in waiting of a balance sheet. This is ONLY my opinion and of course wish you and “others” well if you are long the equity or their heinous preferred A they keep issuing at a whopping 8%.
          Investing is about intellectual honesty. I am true to my truthful opinions and act without a hint of malice to succor others at all times, Nomad

          1. Just wondering. Who holds the record for longest, angriest rant on a preferred stock they do not own even a single share in. Is it you?

            Sure ain’t me. Own tons of it in margin accounts – and have since its listing. Added to my holdings in April at just under $24.83

            My best QDI preferred from a yield perspective, and a top five holding from a share price stability standpoint. Love the monthly payouts, which help smooth out my lumpy cash flows.

            Can’t ask for much more!

            1. Quick, I truly am glad you have found a perfect preferred that fits the quality and caliber of your portfolio. You may not know, but I managed money (instructionally and for some individuals) for 24 years and many of my old clients still follow each of my posts. My “rant” is directed at many of them who still may have Ladenburg (LTS) (I owned it in many portfolios many years ago) or other heinous companies with atrocious balance sheets IMHO. I only wish you profitable investing with all your investments. My opinions should not influence you, but hopefully encourage you and others to do their own deep due diligence before investing one’s hard earned fortune…
              Be Well, Nomad

              1. Nomad, thanks for all the knowledge you share. I always appreciate your perspective. Even when you call TOO-E poop, or possibly something just stinky. I don’t speak Latin but got your general drift anyway. It’s obvious to me that you have best intentions. However I warn you there’s a risk of being called a curmudgeon.

              2. Nomad, Please keep ranting. Your posts are long on supporting details, surprisingly informed at times and short on blather. Confirmational bias narratives are next to useless. More please.

                1. alpha8, thank you for your reply. I hope we can each help this community that Tim has fortunately founded in some way and I am always here to assist. Many are just my opinions, but that’s after I have done the deep due diligence before I would recommend or denigrate any security. I am honored to be apart of this community and look forward to the future…
                  Have a great weekend and wishing all the families and mothers a Happy Mother’s Day, Nomad

                  1. Nomad. You are always helpful and I am glad to be part of all this. I have learned a lot and hope to continue to do so. Your experience is invaluable. Thank you

            2. Well this won’t be the longest rant – but I have to say I agree with Nomad and Grid on this dog, LTS.

              I used to own some of LTS preferred shares – bought under par. made decent money on both cap gains and dividends. But I got out of it a couple years ago as the company started to smell.

              Too much of management enriching themselves. Too much of LTS going back to the trough to issue more and more stock in order to pay dividends on the existing preferreds. Too much of management being tainted with some questionable dealings. So I bailed and haven’t looked back.

              To me, this is a disaster waiting to happen. A classic ponzi scheme with the new stock issuance to pay current dividends and management bonuses. Eventually it will all come crashing down on itself. You don’t want to be a bagholder when that happens.

        3. BTW Citadel, after you saw the “earnings” of LTS yesterday; can you please tell me just how their management can justify these outrageous bonuses:
          For 2018, we granted a $1,775,000 cash bonus to Richard Lampen, our chairman, president and CEO; a $1,550,000 cash bonus to Mark Zeitchick, our executive vice president; a $800,000 cash bonus to Adam Malamed, our executive vice president and chief operating officer; a $450,000 cash bonus to Brett Kaufman, our senior vice president and chief financial officer; and a $450,000 cash bonus to Joseph Giovanniello, our senior vice president-corporate and regulatory affairs. We also granted a $1,525,000 cash bonus to Howard Lorber, our vice-chairman. This bonus was based on the contribution made by Mr. Lorber to the growth of our business, including through recruiting, acquisitions and development of client relationships. Additional considerations for the bonuses for Messrs. Lampen, Zeitchick, Malamed, Kaufman and Giovanniello for 2018 included: increased consolidated revenue, net income and adjusted EBITDA; the continued growth in number of advisors through successful recruiting and in levels of advisory and total client assets at our independent advisory and brokerage businesses; the growth of cash sweep programs; the implementation of increased levels of shared services across the enterprise; improved results at our investment bank; return of capital to shareholders through increased common stock dividends and share repurchases; and the success of our public offerings of senior notes. Bonus payments for our executive officers in 2018 were greater than those paid in 2017 due to our compensation committee’s subjective assessment of our overall performance in the context of the business environment in which we operated and its consideration of the factors described above.

          In addition to his bonus award described above, Mr. Malamed received a retention award of $400,000, which vests in two equal annual installments at December 31, 2019 and 2020. Under the terms of the retention award, Mr. Malamed is required to return 100% of the retention award after taxes if he voluntarily terminates his employment with us or is terminated with “Cause” (as defined in his employment agreement) prior to December 31, 2019. Mr. Malamed is required to return 50% of the retention award after taxes if he voluntarily terminates his employment with us or is terminated with “Cause” (as defined in his employment agreement) prior to December 31, 2020. The retention award will be reported in the Summary Compensation Table in our proxy statement for the years in which it vests based on his continued service.

          27

          In addition to his bonus award described above, Mr. Kaufman received a retention award of $100,000, which vests in two equal annual installments at December 31, 2019 and 2020. Under the terms of the retention award, Mr. Kaufman is required to return 100% of the retention award after taxes if he voluntarily terminates his employment with us or is terminated with “Cause” (as defined in his employment letter) prior to December 31, 2019. Mr. Kaufman is required to return 50% of the retention award after taxes if he voluntarily terminates his employment with us or is terminated with “Cause” (as defined in his employment letter) prior to December 31, 2020. The retention award will be reported in the Summary Compensation Table in our proxy statement for the years in which it vests based on his continued service.

          In addition to his bonus award described above, Mr. Giovanniello received a retention award of $100,000, which vests in two equal annual installments at December 31, 2019 and 2020. Under the terms of the retention award, Mr. Giovanniello is required to return 100% of the retention award after taxes if he voluntarily terminates his employment with us or is terminated with “Cause” (as defined in his employment letter) prior to December 31, 2019. Mr. Giovanniello is required to return 50% of the retention award after taxes if he voluntarily terminates his employment with us or is terminated with “Cause” (as defined in his employment letter) prior to December 31, 2020. The retention award will be reported in the Summary Compensation Table in our proxy statement for the years in which it vests based on his continued service.

          Equity Awards. We grant stock-based awards, which may include stock options and restricted stock, to incentivize executives for long-term performance and to provide an appropriate balance between our long-term and short-term incentives. We believe that providing a meaningful portion of our executives’ total compensation package in stock-based awards will align the incentives of our executives with the interests of our shareholders and with our long-term success. The percentage of compensation paid as long-term incentives as compared with cash payments is made through a subjective determination. The compensation committee develops its equity award determinations based on its judgment as to whether the total compensation packages provided to our executives, including prior equity awards, are sufficient to retain, motivate and adequately reward the executives. We generally grant shares of restricted stock that vest over a period of four years beginning on the first anniversary of the grant date. We believe that this vesting schedule contributes significantly to the retention of our executive officers because they must remain employed for at least one year before they can realize any potential value from a restricted stock grant and will need to continue in our employ for the duration of the vesting schedule in order to realize the maximum potential value.

          In January 2019, we granted 400,000 restricted shares of common stock to each of Messrs. Lampen and Zeitchick, 275,000 restricted shares of common stock to Mr. Malamed and 60,000 restricted shares of common stock to each of Messrs. Kaufman and Giovanniello. In January 2018, we granted 325,000 restricted shares of common stock to each of Messrs. Lampen and Zeitchick, 200,000 restricted shares of common stock to Mr. Malamed and 50,000 restricted shares of common stock to each of Messrs. Kaufman and Giovanniello. The foregoing restricted shares vest in four equal annual installments beginning on the first anniversary of the grant date, subject to certain exceptions.

          We generally grant equity awards through the shareholder-approved 1999 Plan and the 2009 Plan. Each of the 1999 Plan and the 2009 Plan is administered by our compensation committee. To the extent permitted under the provisions of these plans, the compensation committee has authority to determine the selection of participants, allotment of shares, price, and other conditions of awards.

          Dividends on Unvested Restricted Stock. Under the terms of restricted stock awards made to our Named Executive Officers under the 2009 Plan, dividend distributions are made to the executive officers with respect to unvested shares of common stock. These distributions are made at the same rate as dividends paid on all other shares of our common stock. In 2018, Named Executive Officers earned cash dividend payments on unvested restricted stock as follows: Mr. Lampen – $32,000; Mr. Zeitchick – $32,000; Mr. Malamed – $18,000; Mr. Kaufman – $5,000; and Mr. Giovanniello – $5,000. In accordance with the disclosure rules of the SEC, these amounts have not been separately reported in the Summary Compensation Table because the value of the dividends was included in the initial grant date fair value of the underlying stock grants which is reported in the table.

          28

          Other Compensation. We maintain various employee benefit plans, including medical, dental, life and disability insurance and 401(k) plans, and these plans are available to all salaried employees. We pay all medical, dental and basic life insurance premiums for our executive officers (except for Mr. Lampen) pursuant to their respective employment agreements. We reimburse Mr. Lampen, Mr. Zeitchick and Mr. Malamed, on an after-tax basis, for various automobile expenses and Mr. Lampen for certain health, dental and life insurance premiums. In addition, we reimburse certain of our executive officers for club memberships and dues.
          Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves
          Nomad

          1. Wow! Looks like the top guys don’t even pay out-of-pocket for toilet paper, their whole life-style is covered by the company.

          2. Meh…I don’t begrudge top executives their bonuses, its a highly competitive business after all. You’d have to compare their salary/bonus packages to other national brokerages to see whether they’re in-line with the industry or not. In fact, I’d be surprised if Ladenburg’s top competitors didn’t have similar or even better compensation packages to retain their key people.

  1. President Donald Trump on Thursday said Chinese President Xi Jinping wrote him a “beautiful letter” and that they would probably speak soon. Trump’s comments came shortly before a delegation is due to arrive in Washington for the next round of trade talks. Tariffs on $200 billion of Chinese goods will rise to 25% from the current 10% Friday in the absence of a deal. Trump said “we’ll see” about striking a deal “but our alternative is an excellent one.”

  2. I’ll take the other side of the $1 bet. (Although I usually only bet a quarter when trying to guess political events.) Friday trading should be entertaining either way.

  3. Got to love the blind grey market illiquids for fun. I got 100 more of IPWLO at $85 this time after buying 100 at $88 a couple weeks ago. And a few minutes later, someone paid $88.50 for 100. I guess this means my current bid at $84 isnt going to happen.

      1. P, seems very odd doesnt it. I have played these a few times but only when it was a lay-up. Like the B issue in upper 25s and going exD with no call. Or the E issue when it went under par not to awfully long ago. Other than that I treat it with call respect and dont play with it at current prices. Very strange that a high rated insurer which makes money off spreads would be so indifferent to these issues isnt it.

        1. Grid, AGO-E is my only remaining past-call holding whose price exceeds par + accrued. Bought at 24.56 and though no guarantees, using Assured’s $200M, 7% Senior Note/call date 2004 and the AGO-B $100M, 6.875%/call date 2006 as the canaries in the coal mine and the combined $300M outstanding as a buffer against any surprises. No reference I noticed in the last 10-K of any possible redemptions, though to P’s point, we can be sure the deal-makers are pounding on the doors to start the refi process on that at least that $300M. It appears to include “E” would require a $530M new issue. Possible though taking a calculated risk it won’t.

      2. P, I sold off my CKNQP at a tasty little profit today. Getting $105.75 was just too good to pass up. There have been several that I have had to let go of recently.

        1. Grid, I bought some AGO-B back in December for $24.90 and it just keeps going up and up. Normally I would have been out by now except they have left it uncalled for 13 years. Weirdest thing. Probably sell and keep just the E bought recently at $24.50.

          1. P, Like you point out, especially given the long past-call coupon it’s remarkable AGO-B has not been redeemed/replaced as high-IG Assured could easily lower the coupon at least a full point with a new issue. Was reviewing the YTCs on a stack of issues yesterday (Tim made it easy) – it’s not pretty.

            1. I dont blame you guys for holding. Its a guessing game on redemptions. I played a similar strategy today buying AEH at 25.70. They just redeemed their old 6.5% sister. But this one lives on with divi kicking out end of month. It also has came down in sympathy with AED being announced for redemption.
              MFZ, Im glad you didnt buy HL-B. The risk reward factor really isnt there for its yield and financial situation.

        2. Grid, I remember you mentioned HL-B sometime back around $52. Now it is back at $52 (almost 3-year low). The common is down 12% on earnings. The street rates it as more solvent than 40% of all companies they cover and CFRA risk rating is moderate. Opportunity to start a small position?

          1. MFZ, I already flipped out of it for a quick $3 profit. This is usually the price I buy to flip…But Im staying out now. I like to trade it when it (the preferred) is doing its own thing unrelated to the common stock. Im a bit hesitant to play it when common is tanking and their earnings were poor. I dont really consider this a holding issue. In fact it is poor value compared to the B3 2021 Bond which is a bit under par….This really is a bad play being its no better than CCC if it was rated. Look at the Hecla bond below, as I hope it scares you off as I dont like people losing money.
            http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C605565&symbol=HL4080028

            1. Grid I generally stay away from miners and shippers but maybe I’d be a mad money buyer if Brookfield owned it and paid me 11.5%, lol

            2. Thanks Grid. I totally agree with you, it does not look good. Better to sleep well at night rather than buy a speculative issue.

  4. What seems to be holding well for me is the municipal bond ETF’s and funds I established in April. It is following the expectations of going up when interest rates are falling at least for this week

    1. Municipals are doing well obviously because of declining long rates but less obvious because of the new tax law especially in high tax states. I think people are starting to realize the consequences of the new tax law after they filed this year.

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