Are you ready for another week with big moves in equity markets? I am pretty darned certain we are going to see some big moves, which make me nervous, but there is nothing I can do about it—not going to sell, but probably will be doing a little buying—in fact I have a target in mind for today. Of course I will post anything I do.
Last week the S&P500 moved higher by a measly 1/2% (or thereabouts) and the range it traveled in was ‘relatively’ mild compared to the recent past. The range was only in the neighborhood of 1%. This week we have the personal consumption expenditures (PCE) number being released on Friday which we all know will be important, but we also have durable goods and consumer confidence numbers being released and markets will decide if they are important or not.
The 10 year Treasury wanted to push lower all week long and hit a low of 4.17% on Thursday before bouncing to close the week at 4.25% which was 5 basis points lower than the 4.3% close the previous week. Housing release numbers last week were mainly strong–building permits and housing starts BUT at the same time builder confidence fell to low levels. You have to ask if housing permits and starts were so strong why are the builders feeling poorly? Existing house sales were quite a bit above expectations–contrasting with recent consumer confidence numbers which have been pretty weak. Once again these contrasting numbers lead me to believe that folks are somewhat confused as to what direction this economy is taking.
Of course we had the FOMC decision to leave interest rates unchanged–and chair Powells presser left me with the impression he is a bit confused as well–what will tariffs do to inflation etc? There are no firm answers and more data will be needed to have a firm conviction.
Maybe the largest economic announcement last week was that quantitative tightening was getting a little looser as the FOMC announced they were cutting the run-off to around $40 billion/month from $60 billion. I had suggested this could happen last Monday on the ‘weekly kickoff’–I was thinking maybe they would cut the runoff in 1/2, but 1/3 works. We’ll see if it helps move interest rates a bit lower.
The Fed balance sheet fell by just $4 billion last week–we’ll see if this starts to show the average monthly at $40 billion right away–no doubt in my mind this will happen instantly. If this helps rates down 5-10 basis points it will keep a little of the political pressure off the Fed – FOR NOW.
Last week was pretty quiet in preferred stocks and baby bonds as the average $25 share price rose by 4 cents. Investment grade issues rose a penny, banking issues rose 7 cents, CEF preferreds fell a dime with mREITs off a nickel. Shippers popped higher by 6 cents.
The fixation on tariffs today reminds me of the fixation on Brexit back in 2018, which turned out to be a fantastic buying opportunity. Caveat emptor!
Citadel, good point. Just pick and choose wisely.
I seem to remember one of the issues that caused panic was pension fund holdings. They had to institute a temporary freeze on withdrawals then limit the amount that was allowed. There was even talk of only giving less than full value if they had to liquidate assets to fill the withdrawals. So one thought might be insurance.
Tim, I sold all my SPMA today. Been buying and selling since November. Collected a couple dividends and netted about 10 cents on sales each time, buys at 23.99, 2.50, 2.75, 2.80 Sold at 2.90 and 2.80 and 2.60
I had 3 concerns, volume was causing me problems selling at Fidelity and even with an 8% yield the market wasn’t showing no love for this BB as it struggled to get over par. My main concern was the business plan of the issuer SPMC, 90% of their loans were structured as equity and only 10% debt. One of the few BDC’s this heavy into equity. I started thinking this is similar to PIK ( payment in kind) when a BDC has a problem loan and restructures the loan to accept something other than cash. Loans to software companies don’t leave many hard assets in a bankruptcy to seize. One blogger on SA was estimating equity BDC’s were up to 3 to 4% non performing loans.
I realize a BB is not the common and the interest has to be paid before common shareholders but I looked at the risk of capital loss in a bear market.
Well, Charles, I was going to forward the link to ADS’ recent article on SPMC. I thought his analysis might be useful. As I read it, though, I saw your comment there, so you already did that DD.
Thank you for your analysis.
mbg that was me thinking out loud.
I have been researching BDC’s with the thought of buying some of the common of different ones to juice my income. This wasn’t one of them.
I was looking at CLOs — which are starting to wobble — and stumbled into BDC land. There are similar risks with BDCs holding variable rate loans in a declining rate environment.
You might want to look at PBDC Putnam BDC Income ETF to avoid single company risk. There is a YouTube video out there with the fund manager and I was impressed. He is a selective buyer, not a “just buy everything” indexer type. The interviewer is knowledgeable. PBDC has a high expense ratio which the manager explains, SEC rules. (Listening to the video I thought of Howard Marks who says – you can improve your batting average with riskier investments simply by DYODD and culling out the really bad risks. ) JMO. DYODD,
Inside PBDC: One click access to Top 20 Lenders
https://www.youtube.com/watch?v=JWCbD4BQadM
Warning: YouTube has annoying ads.
Thanks Bear, I’ll check it out.
I just picked up a shopping center Reit preferred today on a GTC order.
This sums up my feelings on the BDC sector right now.
https://seekingalpha.com/article/4766657-pbdc-on-the-chopping-block-the-bdc-bonds-are-still-better
I don’t think we need to stop looking at the common of BDC’s but like Citadel West mentioned, probably an idea to put on your shopping list.
But in the mean time stick to safer options.
“he is a bit confused as well–what will tariffs do to inflation etc? “. Aren’t we all? There is pressure in the real estate asset market as rates shot up so fast and furious while the prospect of higher down the road to inflation must leave Powell dazed and confused where the economy is headed. Well back to rear view driving, when we hit something we will get out of the car and assessed the damaged.