Volatile Markets So We Add a Couple Issues

Wow, who would have guessed that after the DJIA being down over 800 points Tuesday night and the 10 year treasury being off 10 basis points (it was trading in the 1.73% area over night) that we would end the trading day with a DJIA gain of over 250 points and a 10 year treasury at 2.07%.

While the DJIA ended up strongly the average preferred stock ended up with another loss with the average $25/share issue off about a percent, which when added to losses from earlier in the week bring the weekly loss to near 1.75%.

There were  plenty of individual preferred issues with losses in the 2% area, but most of them were low coupon issues such as the Public Storage 4.90% issue (NYSE:PSA-E) issue which closed down 65 cents, the Public Storage 4.95% issue (NYSE:PSA-D) down 70 cents and the JPMorgan 6.1%  issue (JPM-G) down 50 cents.  While these moves were meaningful as they brought the current yields on these issues to 5.41%, 5.33% and 5.83% respectively there is a fair chance they will get even better in the months ahead. These current yields are lower than we want from perpetual preferreds at this point in time.

We did take the opportunity to make a couple of purchases today in the model portfolios.  In the 2015/2016 Blended Income Portfolio we purchased a modest 200 share position in REIT Realty Income (NYSE:O) at $56.  Shares were off over $3/share today and were already off their 52 weeks by $13/share.  The current yield on O is now at 4.35%, which while somewhat meager reflects the low risk level for this very safe REIT.

We also added shares of AES Trust III $3.375 Convertible Preferred Securities (NYSE:AES-C).  While we do not generally follow convertibles this issue has a 6.75% coupon and is issued by utility company AES, a large utility operating in 17 countries with annual revenue of over $15 billion. While AES is not investment grade rated the quality level is adequate to give us a reasonable ability to sleep at night.  We own a fair number of shares in our personal portfolio and have been pleased with a general lack of share price volatility–we like smooth price action with a reasonable yield.  These are $50 shares and had been trading in the $50.25 to $50.50 area and today traded down to $50.10–we were able to secure shares for $50.15.  We purchased 300 shares for the Blended Income Portfolio.  These shares became redeemable in 2008 at $50 plus accrued dividends.  Remember that being a Trust Preferred the dividends paid on this issue are “interest” instead of true dividends and thus are NOT qualified for preferential tax treatment.  Note that the debentures in the trust mature in 2029 which fits right in with our shorter duration theme–meaning less volatility. We must note that this is an idea which we picked up some time ago on the Silicon Investor message board and is not an original idea.  Even though we did not have this idea ourselves originally we have no problem surfing quality message boards for solid ideas–and we always recommend that investors feel free to “borrow” ideas from others–it is how we learn, and there are lots of dedicated income investors with their ears to the ground searching for value.

With these additions we lower our cash position by 25% leaving it at the 14% level–plenty for potential bargains, although we are not expecting further market disruptions, but one never knows when they might present themselves.