All right, here we go again.
The Treasury long bond is testing its price lows from last August and September, and Wall Street is bracing for more trouble in the wake of Friday’s monthly jobs report.
Even the normally unflappable stock market took fright at the specter of “Fed tapering,” with the S&P 500 index closing down for a fifth day in a row on Thursday—its longest losing streak since September.
I won’t be drawn into the fool’s game of trying to predict the November payroll number, or the financial markets’ reaction to it. Instead, I advise you to take a longer view. Have a plan ready to execute if investors overreact (as they often do) to the jobs report.
Be prepared, for example, to scoop up some of the preferred stocks. As this chart indicates, the bank and insurance preferreds represented by exchange-traded PowerShares Financial Preferred Portfolio (PGF) are, as a group, holding well above their summer lows—despite weakness in the Treasury market.
This is a subtle, but important, signal that “big money” sees excellent value in preferreds. Indeed, the average investment-grade preferred now yields about 360 basis points more than the 10-year Treasury, compared with a norm of around 200 basis points during the calmer seas of 2004-06.
In other words, if interest rates rise in coming months because of steadier economic growth, the yield on the tenner could climb 150 basis points (to approximately 4.4%) without necessarily pushing up preferred yields at all. It’s Treasuries that are overpriced, not preferreds!
My strategy, then, is to pick off isolated preferreds that temporarily slip out of line with their peers (i.e., become too cheap). Recently I mentioned the J.P. Morgan Chase Series O (JPM.P.D). Current yield: 6.8%.
Equally intriguing, we got fresh buy signals for the two other preferreds, the Bank of New York Mellon Series C (BK.P.C, 6.4% yield) and the Wells Fargo Series O (WFC.P.O, 6.2% yield), as well as one preferred we hoped to buy, the State Street Series C (STT.P.C, 6.4%).
As an ETF alternative, you’re welcome to buy the PowerShares Fund (PGF). Current yield, based on the most recent monthly distributions: 6.5%. We’re tracking PGF as an Aggressive Play for income, outside the model.
Among the common stocks we’re following, Coca-Cola (KO) took a slight hit on Thursday, on no particular news developments. If you don’t already own the shares, this is a chance to start building a position, at a reasonable price, in one of the world’s most powerful brands.