Wow These Markets are Wild

Sitting at my desk I have the SPY ETF charts running on one of my large screen monitors–I run 3 large screens, and the ups and downs could make a person crazy. One minute SPY is up 1% and then 15 minutes later it is down 1%–it only takes a tiny bit of ‘fake news’ to send shares up or down. We were all primed to deal with rising interest rates and then we get to deal with the Ukraine invasion–seems like it is always something.

I have been nibbling almost every day—tiny quantities–I mean really tiny–25 or 50 shares of various issues each day. With all of the global disruptions it is difficult to feel highly confident in buying in quantity. Thus far I have just been adding to positions that I already held–i.e. Arbor Realty, Ready Capital, Prospect Capital preferreds and a few others. I intend to jump into some investment grade issues–those that don’t meet my 7% current yield hurdle, but offer a nice discount to $25 liquidation, but one can’t help but think there will be lots of time to make this move and at even more favorable prices. I have lots and lots of dry powder ready to go when the time is right (who really knows when this will be).

Of course the Fed is now backed into a corner somewhat–ranging inflation and a country invaded by Russia and the Fed needs to raise interest rates in 2 weeks. I think it is the right thing to do–at least the 1st 1/4% hike and then wait. Obviously these are the types of decisions that will continue to disturb markets for weeks to come and which will rock prices likely to drive prices down from even the current levels.

We watch and wait.

35 thoughts on “Wow These Markets are Wild”

  1. There seem to be some (limited) opportunities: if you want over 6%, TDS-V now yields 6.5%, ABR-D yielding 7.2% at price it closed at today. ATLCL is basically at par, 6.125% coupon and term. PRIF-L is under par, term, w a 6.38% coupon. Disclosure: i own some of these.

    1. At about equal yields, I prefer TDS-U over TDS-V for the higher coupon and the slightly closer first call date. If rates were headed down, I’d be doing the opposite.
      Just my opinion.

    1. From the 8-K accompanying the Sr. Notes offering last September:

      On September 16, 2021, The Hartford Financial Services Group, Inc. (the “Company”) commenced a proposed offering of its new senior notes (the “Senior Notes”, and such offering, the “Notes Offering”) pursuant to the Company’s preliminary prospectus supplement dated September 16, 2021 and the accompanying prospectus dated May 17, 2019, which have been filed with the Securities and Exchange Commission. The Company intends to use the net proceeds from the Notes Offering to redeem in full the outstanding $600 million principal amount of the Company’s 7.875% Fixed-To-Floating Rate Junior Subordinated Debentures due 2042, which are redeemable at par on or after April 15, 2022 (collectively, the “Proposed Redemption Notes” and such redemption the “Proposed Redemption”).

      Of course, conditions have changed substantially since then. 2WR has opined that HGH is a goner. I think that he’s most likely right, but I also think that there’s some reasonable probability that HGH will not be called right away. As I understand it the stated “intent” is not actually a commitment and could be revisited based on conditions. I guess we’ll know a bit more next week. Even if it’s called, with last interest payment, nothing to lose at $25.40

      1. On HGH, yes it’s “intent” not commitment, but that financing in Sept ’21 locked in a 2.90% note refinancing rate for their stated Use Of Proceeds with no other stated purpose other than to call HGH on 4/15/22. They raised the same amount in Sept as is outstanding on HGH and they extend maturity by 9 years. “We intend to use the net proceeds from the offering to redeem in full the outstanding $600 million principal amount of the Company’s 7.875% Fixed-To-Floating Rate Junior Subordinated Debentures due 2042, which are redeemable at par on or after April 15, 2022.” So they locked in a huge spread and that of course has not changed.

        In addition, HGH will float if it’s not called and right now, the new floating rate would be about 6.10%. With Kemper and its Ba1 rating getting done at 5.875%, HGH with its Baa2 rating would certainly still be relatively expensive money for HIG. So I’m still confident HGH gets called and even if it doesn’t it should be worth 25.40 or better anyway. 4/15/22 you get full coupon of $0.4921875. It’s a no lose situation at this price imho, whether it gets called or not.

        1. I would agree that a call is highly likely, and I’m treating HGH as near cash. If, on some off chance, it doesn’t get called so much the better. That being said, I’ve been enough “no lose” situations to question whether such situations actually exiist.

          1. Oh, I’ve been there done that too, nhc, so you’re right that I was probably too cavalier to call HGH a “no lose.” Heck I bot IG rated MHNC 7 3/4% back in late 2017 thinking it was a no brainer to be on its way to call in 2018 after MHNB 8% had been called in June ’17 and MHNA 8 1/4% the year before that…. Then MHN blew up…. Thankfully MHNC had Maiden North America as a co guarantee and that kept MHNC from being a total disaster, but point is I would have called that a no lose situation too… MHNC eventually got down into the mid teens in ’19 but fortunately I got out with a manageable loss after dividends by selling in Dec ’18 at about $23.

  2. Getting in at the right time in my experience with preferred stocks and baby bonds occurs when the cash flows fly into the ETF’s that buy preferred stocks and baby bonds. The institutions set the prices. When I see large volumes on a stock or bond going up and large share bids to purchase, it signals that the institutions are in the mood to buy that stock or bond. If you look back at the down turns in preferred stocks and bonds, the low point appears to be set when the institutions decide to increase their purchases. Today, Bank of California, a 7 percent preferred had a large order to buy around par value. Bank of California can call this issue.
    It appears to be a very conservative purchase to park money until oil prices stabilize and the Ukraine Russia events resolve. Thus, when I see large institution’s buying, I will start to use my cash and put it to work. It takes a lot of patience and fortitude to resist a good dividend when cash pays zero.

    1. After seeing that a few times I’ll never buy one of those funds again. They push the price against themselves and continue to trade at a bad price.
      As an individual trader I can’t always tell if that’s the reason for price movement but its often a good guess.

    2. FTM:

      The big kahuna $17B preferred ETF PFF has been hit hard with outflows in 2022 – already $140+ million this week and nearly $1.2 Billion YTD.

      I generally don’t like the overused expression “selling begets selling” but that is exactly what is happening in the income space. The outflows have been relentless since the start of the year. PFF also appears to truly “carpet-bomb” individual preferred issues at times when it has to sell. They are price-insensitive.

      It is certainly getting to be a better environment for those with cash to put to work in the income space, but the pain of seeing your holdings continue to fall in price will likely be with us until these outflows cease….or at least slow down.

      1. I’ve not really tried to look – where do you see the amount of outflows for the week in PFF?

          1. Thanks, Rob.. was unaware of etf.com… It looks like a good place to check in every now and then…. will check out PFF’s website too…..

      2. I’d guess this has been explained previously on III….but I don’t understand the need for ETFs being forced to sell. Mutual funds might need cash to cover “outflows,” but I thought ETFs were traded among investors, i.e., when some folks are selling or buying, other investors, not the sponsoring companies, are buying or selling. TIA

        1. That is mostly correct. The ETF never really does any trading. One side of the transaction is usually an authorized participant who is making a market. Sell x amount of ETFs and buy the components in the appropriate weights or vice versa. At the end of the day, they create or redeem their ETF shares in exchange for the constituents directly with the fund. The fact that there is an inflow, or outflow doesn’t mean there is indiscriminate selling or buying as implied here.

          1. If the market selling of the ETF drives its price below NAV, wouldn’t that mean that the AP buys ETF shares and receives shares from the ETF which he then sells, driving ETF price up and/or share price down? And the end result is downward equity side pressure?

            1. yes, selling pressure in the etf would simultaneously show up as selling pressure in the underlying and should mostly be in lockstep with each other. The AP would short the underlying shares basically simultaneous to buying the ETF so they don’t wait to receive shares.

              1. Given the relatively low volume of many of the PFF constituents and wide B-A spreads, how do the APs maintain proportionality of the holdings without disrupting the prices of the low-volume issues? TIA

                1. NHC, a little background on how ETF’s work. Each day, the ETF manager, Ishares in the case of PFF, publishes a list of securities they will exchange for shares of the ETF. The list does not and often will not have 100% of the issues that make up the ETF. Leaving out securities is more common in a bond ETF, but in theory it happens with stock ETF’s also. So Ishares might not include some of the low volume, wide bid-ask spread securities that they hold. And that is fine because the smallest % holdings of the ETF, are probably a fourth or fifth digit rounding error in the overall return of the ETF.

                  The large stock AP’s like Virtu and Two Sigma do an incredible job on ETF’s. They are monitoring the market price/NAV spread in real time and taking automatic actions to narrow the spread. Of course, all of this is 100% automated but they have humans monitoring if something goes way wrong like what happened in the two large flash crashes.

                  The AP’s job is more complicated for bond funds, particularly muni bond funds where some of the ETF constituents rarely trade. The other complicated situation is when you have an ETF that trades during US hours, but is made of of foreign constiuents that are NOT trading at the same time. Think Japanese ETF’s for example.

  3. Not so sure the Fed will raise at oil hitting $125-130 a barrel maybe higher? Oil that high we may be on the way to self destruct the economy. its a wartime economy now., anything goes. If the Fed does raise, it will more likely be a 1/4%.

  4. As you say Tim, “who knows when the time is right” to buy discounted IG low coupon issues. my thought is to dollar cost average. I have several that I started positions in when their current yield was acceptable. Like you say, start with tiny positions. Tiny is in the eye of the (be)holder. When they get more than 2% down in price from my basis, I add enough where they are down less than 2%. If you keep doing this through the cycle. you won’t miss the bottom by more than 2%. When the short covering rally brings prices off the bottom, they could easily be up 2% the very first day.

    1. I’m doing something similar. I started buying 5-5.5% IG issues a coupla weeks ago (I have lotsa cash because I sold multiple positions in November when they announced 6.5% inflation).

      If they drop 50-75 cents, I’ll buy an additional 1/3 to 1/2 position. Will repeat if the drop continues. If there’s a rally, I’ll sell the profitable purchase and DCA elsewhere. If no rally and just another drop, I’ll DCA again. I won’t fret if rates go higher because 5-6% is a whole lot better than the ~4% new issues late last year.

      1. Theo..Not only is the current yield more attractive than the coupon yield, but the yield to call is even better. With the number of exchange traded issues that have been called in the last year or so you know it can happen if rates go down just part way to the rest of the developed world. That premium over your basis could possibly compensate for the extra number of shares you would have to buy of the new, lower coupon issue they would float and use the money to call yours, and still get the same yield on your basis that you signed up for, more or less, from the same issuer. One thing I do a little different is start with less than a third of what I ultimately want, because with the convexity they can move a lot and as you keep adding, you need to buy more shares each time for the same percentage move of your basis.

        1. Lucky, Thanks for reminding me about the more attractive YTC potential. That could also be the deciding factor for me in the choice of an issue closer to par and a beaten down issue with similar static yields (same issuer).

          This correction is different than any other I can recall in the past 20+ years. The yield spread between same issuer pfds has contracted more than I ever recall and that’s not good for swapping.

    1. @Jean, Isn’t inflation supposed to be gone by now, Powell said it was transient, lol.
      All jokes aside, 50BP point hike only makes sense if you A). Want markets to really go crazy (markets don’t like surprises) and B). Are okay with the risk of over-correcting. Also, let’s keep in mind that many of the drivers of inflation are beyond the control of the Fed (high oil prices, labor shortages, supply chain issues, War, etc). When I hear pundits talk about 50BP hike or a series of 50BP hikes, I hear let’s drive the economy into a recession to control inflation. While Powell was wrong about inflation being transient; I agree with Powell about a 25BP hike for a “soft-landing”.

    2. Fed can’t do anything about energy prices or food, main drivers of inflation now (70% of inflation figure last I saw). So, too strong an action probably just damages the economy without curing the problem.

    1. Me too, these lists and also other commenters posting their watchlist is such a nice resource to start my own research as a (novice) income investor.
      I’m currently looking at QRTEP

      1. I have also been adding small amounts to my position in QRTEP. Now have a little more than a full position. The YTM is very juicy. As long as they don’t go BK I can wait 9 years for the issue to be redeemed.

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