Where Do We Go From Here?

I see the equity futures are up near 2% today–which means absolutely nothing except traders love the movements up and down. I think we all know by now that the coronavirus is going to mean the U.S. economy is going to take a hit–exactly when and how badly is the question.

The Fed went into panic mode yesterday with the 1/2% Fed Funds cut–I expected it, but think in general it is ‘balony’ (a technical term)–we already had low rates with a slowly softening economy and if someone believes that this will ‘juice’ the economy they haven’t been paying attention for the last 5 years.

Here is what I believe. I believe that we are slowly sinking toward recession. The corona virus will just give us that last push over the edge of the cliff. This could take 1-2 quarters to play out–and we will watch for further details, but you know there are more than 169 cases of the virus in the U.S. and that we will see widespread school closings and other business closings. The travel and lodging industry are going to be slapped pretty hard–and overall spillover affects will be pretty damaging.

With the above in mind I am continuing to watch the high quality, low coupon preferreds and baby bonds issues–i.e. CEF preferreds and utilities. I think in a few years we will look back and say ‘I wish I could get a safe 4-5% coupon’–well maybe the time to get some of them is now.

I bought some of the ELJ Entergy 5.25% baby bond last week around $25.00. This should be a good holding, but it is callable now so may not be around long. What I would like to have is the same coupon with at least 3-5 years until 1st call date–to try to assure myself I have locked in that rate for the foreseeable future with a quality company.

21 thoughts on “Where Do We Go From Here?”

    1. I like it – bought it on 11/8/2019 at $24.57…full position for buy and hold. For me, unless there is a another compelling reason (like being busted/uncallable), I will not pay more than 1% over par (usually $25.25) for buy-and-holds for reasons of market volatility like we are seeing now. My theory is that, unless the company goes boobs-up, it will always pay the divvy and eventually come back to par pricing when eventually called.

  1. Hi Tim; I believe in your meltdown thesis. Even if medical situations exhibit longer term control, public perception will drag on many facets of life in the intermediate term. Retail sales, Industrial supplies, hiring and employment, sporting events, transportation, you name it. Evidence: you cannot purchase hand sanitizer right now, retail, Florida East Coast. I took some NEE-P today at mid48’s which will yield around 4 and a quarter percent. People will still use electricity I believe.

  2. Each economic cycle ends with a recession, and this one will not be an exception.

  3. Looking at RLJ.PR.A since it is not callable – it got down to the upper $25 but that seems to be the bottom so far. I was hoping to purchase some mid-$25s but no dice. For the preferred “old timers” here, how do you decide where to purchase (at what price?) a semi-unique issue like this one that is not callable? Comments welcome!

    1. Yazzer,
      I gobbled this one up below par during the December ’18 swoon. Have been letting it ride ever since. I’d be a wary buyer right here of anything related to lodging or transportation and have sold much of what I owned in these areas.

      This one, I’ll hold onto simply for the ‘uncallable’ factor. I don’t think many have been flipping this one since it’s been selling at such a premium but you may be able to flip it around the dividend payout. Try and snag it a few weeks in the run-up to the dividend, then sell it right before the ex-date to someone who is willing to pay up for it.

      You may want to check out NYCB-U as another option. Sells at a more reasonable price and doesn’t swing around in price as much as some others. Much more of a steady eddy in the busted convertible space.

  4. If this virus ends up indeed being seasonal like the normal flu then it will be way overblown in the end. Would have hit US way too late in flu season to cause anywhere close to the damage it caused in China. We’ll all be fine IMHO.

    1. Ken–I think it is overblown as well—BUT the general population of the U.S. is much more reactionary than we were in the olden days–with social media–as well as mainstream media. With the start of school closings in Wash. and Idaho it is likely just the start. Some small manufacturers in Minnesota are slowing or stopping production on some finished goods because they either have and are close to running out of some parts needed–and these types of things can cause a rolling disruption.

    2. Ken,
      I saw an interview with a gentleman who had been on the quarantined Diamond Princess ship. He came down with the virus about 16 days ago and said it feels like a bad cold and that he is continuing to improve. He said on a scale of 1-10 he would rate it a low level-2 in severity.

      Unfortunately, the disruption to business will surely be hard felt.

      Leslie Joy

    3. Hopefully it will be seasonal but the coronavirus actually resembles more the common cold viruses rarther than the viruses that cause the flu. Colds are not as seasonal as the flu so I wouldn’t be surprised to see COVID-19 continue to spread into the summer. This thing will be with us for a while, that’s for sure. The question is how much more disruption is it going to cause at the health and economic fronts before we get it under control, and that is not clear at this time. Expect more violent up and down movement in the stock market.

    4. @Ken,

      You are correct. It’s logical. But, as part of the “senior” generation, I couldn’t help but feel a little nervous. One thing; everyone’s sold out of hand sanitizer. And, Amazon was price gouging. Check it out.

  5. Tim,
    I like you, was looking at the Louisiana issues as well as others.

    For example I see now GAB-G @ $25.25, like ELJ also callable and with a quarterly dividend of ~$0.31 (almost 5%/year).

    I wander if this is also something you would like at this point.

    1. dan–a taste may be in order–I would prefer something out 4-5 years, but of course unless we get a bigger downdraft lower I am probably unrealistic. Am ‘shopping’ right now.

      1. Hard to find something of quality, 4-5 years and reasonable yield.

        If you are willing to go 8 years, there is KTH, but only if bot @ << $32. Bid now is $32.07, ask is $33.62.

        I sold a bunch last week @ 33.66 during a (crazy) short window and I am now trying to re-buy < $32, but 0 trades today so far.

        Very low volume and huge spread in this one, though. Requires patience but when executed, is a nice one for flipping.

        What do you (and your excellent, knowledgable readers) think about this one?

        1. dan–I keep looking and I have 2 orders in – but the spreads are wide so I likely won’t execute and will have to ‘pay up’ if I want them.

          I don’t follow the third party issues (just haven’t had the time to add them here yet), but the yield to maturity on this is damned low (2 to 3% counting the 2.10 payment in 2028) depending on the price.

          1. Tim,
            My numbers give me:
            if you buy KTH @ $32, YTM is 3.5% at maturity (without the extra $2.10; with it, I get 4.4% if called close to maturity), unless my math is wrong. Is it?
            At $34 (last trade) then the YTM I compute is 2.6%.
            At $30 (last trade) then the YTM I compute is 4.4%.

            Instead of buying and holding until maturity, fliping making $1-$2 each time has been profitable (just sold some more $33.99).

  6. Chuck P, the swings make perfect sense. That’s what you get when the Vix gets above 20, let alone 40. We are not in a recession yet, but the Economy could slip into one if things get out of control. I disagree on the fed, they had no choice. When the banks don’t have a spread to make a profit they stop lending and the liquidity drys up and you have a recession. Let’s hope for the best. ATB.

  7. Hello Tim; Here’s my take on this virus situation. After watching the young female traveler on ABC national news explain to the world how she was in Italy and then got a “Connecting Flight” in Amsterdam and then back to the USA and telling the world how she was not checked or screened for the virus. It made me realize just how vulnerable we all are. It will only take one huge sporting event or huge concert to change everyones attitude on the whole thing. Once that happens where 400 or 500 all at once get tested positive watch what happens then. Better get to your local grocery store and stock up big time. I’ve got a buddy that has booked 2 bus trips to the ARK and another to BRANSON and I asked him if he was concerned. He said NOPE when its my time then its my time. Some people in life just can’t be helped. By the way these Huge Swings Up and Down are crazy and make no sense in my opinion.

    1. A couple of things…Italy and Korea are now screening passengers leaving the country, so the risk there is being mitigated. Second, the demographic most prone to getting seriously ill from covid-19 are elderly people with underlying health issues, not young healthy travelers. The real threat to investors is the break down of the global supply chain, not cancelled trade conferences and the like. So far the supply chain is holding up pretty well, although you’re not likely to hear that on social media or the cable TV news.

      1. A couple of observations:
        1. Screening is helpful, but a leaky sieve at best. People can have the virus, be capable of spreading it (contagious), and show no symptoms. Current screening techniques simply won’t catch them. The screens create the illusion of protection and provide political cover (i.e. they allow govs to say they are doing something), but they can only slow the spread, not stop it.

        2. So far, the groups showing the worst outcomes are indeed those who are older and have underlying health conditions. However, that has nothing to do with who can carry/spread the virus. Young, healthy travelers who have the virus are more likely to have milder symptoms and be harder to screen out – but they can carry it around the world and transmit it to others.

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