Up and Down and Up and Down–Lots of Indecision in the Markets

Last night and early today I thought “it looks like a down day” in stocks (based on futures and early trading)–I think all of this was related to the corona virus, although maybe it was a delayed reaction to the FOMC not giving common stock traders and investors anything new to trade on at their meeting yesterday. Whatever the reason I guess the clowns decided it was time to drive prices up at the end of the day and we closed up by .3 or .4%.

On the other hand the 10 year treasury wasn’t buying into the stock move as it closed almost 4 basis points lower–again. Whether the corona virus reduces growth globally or not is a total crap shoot at this point in time. No one can claim to know the answer to this at this point in time–honestly we have huge numbers of flu cases each year and literally thousands of death (37,000 estimated in the U.S. last year) from the flu–I could go on and on, but it is just silly. Not that we shouldn’t take the corona virus seriously, but a little common sense would be helpful.

Anyway, let’s take a look at how preferred and baby bonds have done for the week thus far.

You can see from the chart below that it has been really quiet–prices seldom moving, on average, more than a couple pennies week to week.

The grand total movement of the $25/share preferreds and baby bonds tracked here (661 issues) has moved exactly ZERO since last Friday. mREIT preferreds are off 4 cents and investment grade preferreds are up 3 cents since that time.

Note that the 10 year treasury is almost 30 basis points lower than 12/1/2019. This is what makes income securities interesting. It isn’t always true that higher rates drive prices lower while lower rates drive prices higher. That is a big–maybe–sometimes–it depends. More than pure interest rate movements go into pricing these securities–as the chart above shows prices moving sharply higher while rates were a bit higher and are totally flat while rates are tumbling.

Obviously there have been ex dividend dates this week and that always sways the number a penny or two–but all in all this is extremely ‘Goldilocks”–and for some of us we like it quiet. On the other hand there are more active preferred stock traders like Martin G. who would like the see more movement so they can take advantage of the volatility.

One thing that is almost certain–as soon as all of us get lulled to sleep an ‘event’ will occur which will wake us up quick. We shall see what the weeks ahead bring.

14 thoughts on “Up and Down and Up and Down–Lots of Indecision in the Markets”

  1. For whatever its worth to you guys, I just bought 3,500 shares of MPLX at $23.94. Annual dividend distribution is $2.75 which gives you a “Yield of 11.47%. I just am not comfortable buying stuff that comes out at 4.75%. So I’ve had to do deeper research and take somewhat more risk. Life in the Big City.

    1. I own it, but MPC’s indecision has kept me from buying more. The yield is nice though, ain’t it. 🙂

  2. Good morning Tim…one question for you about the chart above, do you exclude preferred issues that are subject to a call notice from the industry groupings?

    1. Citadel–no everything is in there–except suspended dividends. Depending on the group (individual sectors or the grand total) there may be a few cents affect. On the grand total group you always have ex dividends, new issues and called issues–BUT with a near 700 issue sample size affects should be just a penny or 2. On smaller groups like mREITs the affect couple be a number of cents – maybe even a nickel. What I am looking at is a longer term trend–much longer than the 2 months I have posted–but I didn’t start tracking these until early December so am going to have to watch over time going forward.

  3. Tim:
    Interesting graph. Do you have a rough estimate of the average coupon for the “all $25 issue” group, i..e blue line, and the “IG preferred stock” group, i.e. orange line? It would please help to compute the average preferred stock risk premium(s) over the 10 year treasury versus time. The risk premium(s) seem to be creeping up since you started the graph on December 1. Maybe more for non IG preferreds????
    Thanks so much for publishing the graph. You are a help to so many of us. Maybe as many as there are mosquitoes in a Minnesota summer?

    1. Dave–I’ll look into what you ask. No–couldn’t be helping that many people–there are one hell of a lot of mosquitoes in this state.

      1. Thank you sir. For example, if the average coupon for IG preferred on 12/1 was 6.00% (totally hypothetical), i.e. $1.50/sh/year dividend, then the spread over 10 year Treasury would be 4.01%. And on January 30 at $26.33 for IG preferred the risk premium over a 10 year Treasury would be 4.14% which is an increase of 13 basis points. The delta is probably not statistically significant but may suggest that the market is pricing a little more risk for IG preferreds??????? Not much but a little nevertheless.
        If the average coupon is not a simple matter, then please to table the request.
        Can I expect the risk premium to increase if the Fed takes the punch bowl from the party, especially for non IG preferreds?

  4. As a person who lived in Hong Kong during SARS time, it was literally feeling like every day is your last day of life, *every*single*day, lives were lost every day and there’s nothing to cure. I do not mean to escalate fears about the new virus, but the flu is just not comparable, not only the death rate is higher, and that the China gov also won’t let you know the true figure too. The point is, keep up personal hygiene, protect your neighbors and wear your masks if you are ill. (and in fact, the idea to compare the new china virus with the flu in America is one of the tactics the china communist party plays to shift people focus and blame from their wrongdoing)

    Sorry for being off topic.

    1. No problem VinL. My point is that the market is driven lower by that news and 8 hours later it is driven the exact opposite direction.

      1. Yes, the market itself is pretty crazy, and not to mention the surge of AMZN and TSLA, sorry to be sensitive about the plague… perhaps it was because when one actually survived through it…

  5. That chart confused me for a moment because the Treasury yield is plotted, while everything else is plotted as to price.

    Maybe we could see if they move in lock step better if the Treasuries were plotted the same way? I could see utility in doing it the other way as well and wouldn’t want to foist my preferences on anyone else though.

    1. Scott–I’m not getting you–the bottom line is the 10 year treasury with the right side vertical axis.

    2. Scott–what this chart actually shows that rates were moving higher in December by a bit–and prices moved sharply higher, while rates are heading down in January and prices are very flat.

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