WASHINGTON – News headlines have hit stocks hard and fast this week, making it difficult for yours truly to come up with meaningful columns. The ongoing coronavirus mess, chaotic energy stocks, the Trump Impeachment Circus, the State of the Union Address, the emergence of Nancy the Ripper, the Federal government vs New York’s idiotic “sanctuary city / state” edicts, global uncertainty. You mention it, it generates headline risk to the nth degree. And that risk is taking stocks down today across the board.
But even so, after taking a few beatings, including one today, a resilient Mr Market has still got game. Though today’s trading action remains unpleasant, averages continues to soar most of the time in February thus far. In fact, many portfolios are up today despite the downside pressure of global uncertainty.
Is global uncertainty causing US stocks to keep going up the down staircase?
True, stocks did take a palpable hit recently. But almost instantly, most stocks and averages resumed their dizzying and irrationally exuberant ascent this week, today’s selling bout notwithstanding. The greater problem is that stocks have soared too high and too fast. That leaves most stocks and sectors vulnerable to getting whacked.
Even the McClellan Oscillator (below) seems confused. Its recent, double dead-cat bounce was about to launch us back into overbought mode. But as you can see in the chart below, the second ascent got nicked at Thursday’s close, which predicted today’s fear-driven drop.
Chaotic energy stocks make 2020 investing treacherous
Take, for example, my own long-time holdings of Gaslog Partners Class A and Class C preferred stocks (trading symbols: GLOP/PRA and GLOP/PRC – your broker’s symbols might be slightly different). Gaslog Partners’ common shares (just plain old GLOP) pay a swell dividend and the stock has prospered. Ooops. Until just 2 days ago, when this liquid natural gas (LNG) maritime carrier company took a bit hit to quarterly earnings that analysts didn’t expect.
Seems that its older LNG ships are nearly out of new contracts and could get mothballed. It’s all due to plunging LNG prices. Which are plunging, in major part, due to the massive drop in fuel needs in China. Predicated, of course, on that country’s unfolding coronavirus issue. That growing epidemic daily forces loads of businesses to either shut down or curtail operations. This, in turn, vastly decreases China’s normally substantial need for fuel of all kinds. At least for now. Which is a killer for businesses like Gaslog Partners, a company that makes a living hauling LNG to countries that need it.
Worse, even though we’re now in the industry’s normally very profitable winter season, generally warmer temperatures in recent weeks (
global warming climate change for sure!) have also cut back on the need for all varieties of heating fuel. Like LNG.
GLOP and its preferred shares: A feisty trio of chaotic energy stocks
Well, GLOP wisely slashed its dividend as its stock instantly lost half its value in one day. But, unfortunately, its preferred stocks got hit badly as well, although not AS badly. Since my current rule is not to sell for a loss unless the loss exceeds 8% of initial purchase price, both preferreds soon dropped below that pain threshold. Figuring they might snap back, I sold off enough shares (which I’d bought over time) to pare the loss down, which was painful but necessary, as one must observe one’s own rules.
But, surprise! Although the GLOP mothership will doubtless continue to absorb some pain for a quarter or two, it’s probably gone as low as it can go. Consequently, analysts have quickly revised estimates in a positive way. They didn’t turn GLOP into a sell. Instead, a couple firms made the stock a HOLD, which a couple others actually turned it back into a buy, figuring the common might pick up one or two points again before the end of the year. (Its price is currently in single digits, so that’s a pretty nice percentage gain if it happens.)
So the common picked up Friday morning. And, finally, both preferreds showed serious signs of life. So I bought part of the position I’d sold back.
Whipsaw action mirrors ongoing global uncertainty
The whipsaw action in current markets, particularly in today’s energy sector, is proving most irritating. Case in point: As indicated I just sold some shares for a loss, but then bought part of that position back at a much lower price when it snapped back quicker than I thought it would.
Still, a loss is a loss, and you hate to get whipsawed that way. But it makes sense to me in the longer run. You buy preferreds for the cash flow, which I wanted to maintain in this case. And these partial spec preferred stocks offer an 8.625% and 8.5% dividend return at par value ($25). Better yet, since they’re preferreds, their dividends aren’t at risk of trimming. Unless, that is, GLOP cuts the common dividend entirely. First.
Stuff like this happens in a volatile market. But you have to keep your discipline to overcome the global uncertainty whose headlines can damage your portfolio.
The volatility of today’s energy sector has gotten really treacherous. I’ll need to watch a couple of my other preferred investments in the oil patch. Oh, well….
Chaotic energy stocks also include the refining industry
On the other hand, the market recently savaged on of my periodic favorite oil patch stocks, mega-refiner Valero (VLO). Given that commissions no longer exist at my brokerage, I’ve slid into this position little by little on down days. At its current price ($84.27 per share, but give it a minute), Valero offers an above average 4.7% dividend and continues to have excellent earnings. Plus, refiners like Valero are generally less affected by oil prices than the exploration and production (E&P) companies are. So the risk is lower. It’s a good way to have at least a modest presence in the energy sector, which otherwise has been a dog for at least 6 months running.
Global uncertainty seems to be sparing today’s excellent US employment numbers. And bonds.
Elsewhere, even though stocks in general are sharply down Friday – off nearly 200 points as I write this at 1 p.m. ET – we had good news from the Department of Labor (DOL) on the employment front this morning. Even better news than analysts expected. Tim McPherson of Innovative Income Investor has the details. They include yesterday’s wrong (as usual) ADP employment report. That’s a private sector number that comes out just before the more reliable Federal number.
“The official government report on employment showed that 225,000 new jobs were added in January–against a forecast in the 165,000 area. ADP had claimed a gain of 291,000 new jobs in their report on Wednesday–but folks don’t pay too much attention to that number as it usually varies substantially from the government number–this time it was directionally correct.
“You would think with this strong number and a 3 month average in the 210,000 area that interest rates would move higher–but no–the 10 year treasury is off 4 basis points–moving just below 1.60%. Most certainly the bond market is reacting to the relatively stable wage growth rate which continues to show around 3% or so wage growth–not bad, but not something to worry about
“For us this is a fairly strong signal that we won’t see a recession anytime soon–absent a black swan event. I believe that someday (When? Who knows) this will end badly for stocks and bonds–but one could have said this for years and years. Having money in a jar buried in the backyard has continued to be a really poor investment.”
Everything is weird. But preferred stocks are holding their own
Yes, bond rates have been as weird and volatile as stocks lately as Tim points out. Since his main squeeze is the universe of preferred stocks (plus a few assorted goodies like the occasional REIT), he cites the bond action since this tends to influence the price movements of bond-like preferreds. BTW, if you find yourself attracted to preferred stocks (which old guys like me generally are), bookmark Tim’s site. His short articles, and the comments from his equally committed fans, make this site a must-read for income oriented investors.
That’s it for now. Have a great weekend. As for me, I’m off with friends to sunny (but chilly) New Mexico next week. So columns will be spotty, as we all enjoy a break in the Land of Enchantment.
– Headline image: Image via Wikimedia Commons, GNU 1.2 license.