We Survive the Day, But What is to Come?

It was an interesting day of trading–although not really much movement after the 1st hour or so–at least in stocks.

The 10 year treasury closed at 1.79%, which is a good bit lower than the 1.87% to 1.94% range we had been trading in for the last couple of weeks. Obviously this is a move to safety after the killing of Iranian General Soleimani.

I have read numerous articles on the affect this will have on the market–and unfortunately they are all pure speculation and mean almost nothing. But this being said a rational person needs to look over their portfolio and see where they might be vulnerable.

The obvious place to be looking for vulnerabilities is in the energy and shipping sectors. If I was a betting person I would expect Iran to attack either oil fields in Saudi Arabia or ships in the Straits of Hormuz in retaliation. I’m not telling anyone reading this anything at all–we all know about these obvious weaknesses. It is the unknown areas that will cause the real issues.

For now I have mostly ‘sat on my hands’. History tells us that this will not be meaningful to income investors–BUT one never knows–if we knew we would have our own reality TV show reading minds and making predictions.

Investors always need to do what makes them able to sleep at night. If that means lightening up for a few weeks, so be it. I think everyone on this website knows that there are no right or wrong answers–just the answer that works for you.

23 thoughts on “We Survive the Day, But What is to Come?”

  1. Making predictions is stupid, but here goes one, lol. I’m a technical trader so I always look at the charts and indicators. The yield of the 10 year influences our preferreds and it is screaming lower yields. I’m not sure what catalyst gets us there but I see us retesting the lows at 1.42% in this next wave lower. No guarantees but probable based on my work. TLT is the play and use a stop in case I’m wrong. ATB

  2. I think investors would be wise to consider what must be going through the tyrant and dictators minds regarding 2020. ‘We may only have one more year to divide up the map of the world.” At least that is the depressing way I see it.

  3. Moral of the story don’t fight the Fed…

    “Not-QE” QE is a very very powerful mechanism.. We have been seeing it for more than a few months now..

    1. That’s all supposed to change GrayhawkAZ, as the year end liquidity crisis has passed and the Fed is scheduled to start paring down its balance sheet again. There are roughly $70 billion in repos maturing next week …lets see how many the Fed allows to expire. My guess is we’re in for some volatility starting Monday.

    2. Could this Iran threat be the Black swan we have all been expecting? Maybe I will find a home for my high cash position of 40 %.Who knowes!

  4. In my view the US preferred market is quite RICHLY valued. On the other hand, the Canadian preferred market is undervalued. I am looking for either new issues in the US market and/or real bargains in the US or Canadian marketplace.

    I am holding firm. 75% of my preferreds are long term holdings. 25% are tactical investments waiting for their targets to be achieved.

    I sure hope the 10 year holds steady. A big pullback will result in more low coupon preferreds in 2020

    1. SteveA: You sure ? I thought when medium and long term interest rates went down preferred stock prices went up ?

      1. Sorry was not clear enough. I would like to see the 10 year stabilize. Then head back to the 2% – 2.25% range.

        Until that happens, the NEW preferred issues coming to market will probably be issued with low coupon rates.

      2. Bill – better not to generalize on rates and pref prices. Different rate structures will cause different issues to behave differently in response to rate changes. For fixed rate perps, you are right that prices should go up as rates go down. Assuming, of course, rates aren’t going down as the economy crashes. In which case faxed rate perps may crash, too.

        But consider the behavior of other rate structures in a declining rate environment. Some US min rates will go up as the min kicks in (think USB-H). LIBOR resets may go up or down, depending on the reset terms. Canadian 5-year resets should go down if rates fall.

        The opposing behavior of fixed rate perps and 5-year resets is a reason to consider owning both. Most 5-year resets come out of Canada, although a few Canadians are US$ denominated. There are now a handful of US 5-year resets but they are grossly overpriced relative to Canadian issues.

        1. Ah USB-H.. Man I wish they could get another 100 bps before LIBOR goes away to make it interesting.. But 350 bps seems to the coupon for a while if the Fed has anything to say about it…

      3. The two main risks for preferreds are interest rate risk and bankruptcy risk. If rates go down because of a struggling economy, preferreds could also go down because of increased bankruptcy risk. and vice versa.

      1. Hi David,

        I use Schwab. If an OTC symbol already exists, you can buy Canadian preferreds commission free.

        Schwab will also place a trade for you for any Canadian preferred that doesn’t currently have an OTC symbol. It costs $25 commission per trade. However, after you complete the first trade, Schwab will send it to FINRA and an OTC symbol will be set up and then it trades commission free after that. I’ve done this myself a few times.

        If you want to get an OTC symbol set up through Schwab, call the Global trading desk at 800-992-4685 and ask to get connected to Keith in Indianapolis (the team lead) and he will take care of you. It took me less than 10 minutes last time I did it and the OTC symbol automatically appeared in my account the next day. If you get a new symbol set up, please post it on this site.

  5. I was looking at buying gold/silver coins yesterday (never had before), but I changed my mind once I saw how much the sales tax would be.

    No way I’m paying a tax to buy money.

      1. CEF is another easy and cheap way it seems… It’s a closed end fund still trading at a discount. Using cefconnect’s description, its purpose is “To provide an investment alternative for investors interested in holding marketable gold and silver related investments. The fund invests primarily in long-term holdings of gold and silver bullion (i.e. at least 90% of of its net assets and 85% being in physical form) and does not actively speculate with regard to short-term changes in prices of these commodities.” fees = .38% . It’s old info but as of 12/31/17 according to cefconnect, it was 2/3 gold bullion and 1/3 silver bullion, 2,156,000 oz gold, and 1,268,000 oz silver… My guess is you personally don’t have a vault big enough for these amounts of gold and silver nor do I..

  6. I think energy and shipping could actually be winners from an expansion of Middle East conflict rather than vulnerabilities. Anything that spikes the price of oil is good for energy preferreds. Shipping is a little hit or miss. Mideast conflict is probably good for tankers but could curtail global trade which would be bad for dry bulk and containers.

    1. Low oil price is bad for the energy sector. Higher prices should be good for non-oil energy companies.
      Shipping is too risky for me. Current rates are too low and too many customers are at risk of not paying their bills.

  7. I have been very surprised by the mild market reaction so far. I think we’ll have a bigger move when Iran retaliates. I’m expecting a large flight to safety (with the 10 year around 1.25).

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