The market’s recent advance has been slow to spill over into the high-yield space in a meaningful way that would be reflected in new 52-week highs. Roughly 30% of Cash Machine holdings are energy-related, and with crude trading at just above $75 per barrel today, there is going to be downside pressure until crude prices begin to recover.
Many master limited partnerships that encompass the majority of Cash Machine‘s exposure have defended their franchises during the third-quarter reporting season, citing strong hedging programs, low production cost basis and strong end-market demand that will continue to support the current distribution rates. As much as the market wants to believe this commentary that expands across all our holdings, the price action has been weak, suggesting that there has been a general lightening up of MLP exposure until oil prices firm.
The upcoming Organization of the Petroleum Exporting Countries (OPEC) meeting scheduled for Nov. 27 will shed some much-needed light on its intentions regarding whether future cuts in production levels are likely. Based on the current pricing environment, the market is saying, “Don’t count on it.” So, what we need to monitor is whether the market finds supply/demand equilibrium at its present level. This metric is pivotal in whether sentiment will recover over the near term.
Conversely, natural gas rallied from $3.50 per MMBtu to $4.50 per MMBtu, fed by a massive short squeeze in front of the winter weather pattern that is crossing much of the country and pushing temperatures below freezing this week. After a retest of the $4.00 level, natural gas is trading back up to $4.20 today, a good sign of firmer prices ahead. This is significant because most of our MLPs have a high percentage of total production in gas — as much as 50%, in some cases.
Behaving better are the mortgage real estate investment trusts and specialty finance companies, which are taking full advantage of super-low borrowing rates and deploying those funds into attractive mortgages or commercial real estate that throws off strong income. Shares of REIT-related companies Capstead Mortgage Corporation (CMO), Javelin Mortgage Investment Corp (JMI), Orchid Island Capital Inc (ORC) and Northstar Realty Finance Corp (NRF) have firmed up in recent weeks, as have business development company/collateralized loan obligation-related names like New Mountain Finance Corp. (NMFC), Apollo Investment Corp. (AINV), PennantPark Floating Rate Capital Ltd (PFLT) and TCP Capital Corp (TCPC). Q3 results from these sectors were broadly upbeat, while forward guidance was also reassuring.
Following the spinoff of New Senior Investment Group Inc (SNR) from Newcastle Investment Corp. (NCT), management replied to requests for clarity on forward dividends for each company by stating that they haven’t decided yet what those payouts will be. This is fairly ambiguous from a management team that has a history of laying out a dividend policy for previous spinoffs right away.
My intention all along was to sell NCT and keep SNR, as the senior housing sector should continue to thrive against very favorable demographics for that industry. The remainder of NCT’s assets is primarily various classes of commercial paper, and with the stock up from $4.00 to $4.80 in the past week, I want to exit this position into short-term strength. So, the plan is to sell NCTwhile keeping SNR for now.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.
