Investors are Hungry for Low Quality Instruments This Week

We always watch a few indicators to see just how income investors are acting on any given day–let’s call it the pricing ‘tone’ of various income securities.  This week we have seen a strong bias of income investors to start nibbling at some of the lower quality preferreds and exchange traded debt issues that had been off maybe 2-4% over the last month or two as investors awaited potential higher interest rates.

One easy way we watch is simply by counting the number of all $25 preferred issues trading below par. Simple, but telling. Today we have about 155 trading under par–only a week ago we had over 180 under par as investors moved out of some issues prior to a potential rate hike.  Additionally most all of the energy issues have moved higher–preferreds of Gastar (ticker:GST), Vanguard Resources (ticker:VNR), Legacy Reserves (ticker:LGC) and other are all up 25-50% from lows of just a week or two ago. We think that the move higher in the energy preferreds is somewhat foolhardy as we expect all of them to chop distributions barring a miracle in crude and natural gas pricing–meaning energy needs to go a lot higher from here. But the movement of all these issues simply means that income investors are putting on some more risk–at least more than they were will to put on a few weeks ago.

As confusing as these markets can be all we can really do is watch out for black swans–all of these crazy ups and downs are interesting, but at the end they are not meaningful to the income investor.