The markets were down in morning trade following the CPI report, which was dead in-line with expectations. With a year-on rate of 6.5%, the forecasters accurately predicted all four permutations (m/m, y/y, core, total) of the inflation index.
There was some sentiment yesterday that I was picking up, that traders were preparing for a huge upside surprise (i.e., inflation much lower than expected). That did not occur.
In the Real World, the signs that the global economy has slowed dramatically and is flashing red, more so than in some stale, dated government data. Tesla (TSLA) is slashing prices in China, and that is never a way to build either brand equity or shareholders' equity. Amazon (AMZN) is cutting people left and right and Goldman Sachs (GS) joined the layoff party this week.
Sometimes the micro is more important than the macro, though. As an active asset manager I deal with companies that are often too small for the radar screens of the guys who brought you the extraordinary declines in Big Tech names like TSLA AMZN and Meta Platforms (META) in 2022. That is why I am gaining clients at a rapid pace. I know where they are coming from and to whom they are no longer listening.
But in my micro, we are starting to see signs again of a slowing economy, as evidenced by the lowering of payouts. My firm's motto is cash flow never lies. In the vast majority of cases we invest in securities that have fixed payments or payments that are linked to inflation, via the LIBOR rate. That is what I do.
My job is to watch the creditworthiness of the markets and the creditworthiness of what we own. This week I have seen two reductions in payouts -- one that did not affect us, thanks to my choice of preferred over common -- and one that impacts an extraordinarily small holding of ours.
Gladstone Commercial (GOOD) reduced its monthly common dividend payout to $0.10 from $0.125. This is the first reduction since getting to that $0.125 level in 2008. Our preferreds, (GOODO) and (GOODN) , are, of course, unaffected, and in fact cutting the common divided gives a little more headroom for those payouts. What we nerds call the coverage ratio.
I think the culprit at GOOD is the office market. Although GOOD is still reporting 100% cash rent payment access its properties, in a monthly update released last week, management indicated in its most recent release a concern about "economic headwinds." The office market is the first place to look for those winds. The combination of WFH (work from home) and higher interest rates is a double whammy, and Gladstone management is reacting by selling some office buildings while buying more industrial properties.
Bottom line, cutting a dividend is always a sign that management is concerned about a company's financial prospects. I don't sugarcoat. I manage risks by leaning toward securities with fixed payouts
Also, yesterday the too-good-to-be-true quarterly distribution of Knot Offshore Partners (KNOP) became a thing of the past. KNOP announced last night a reduction in payout from $0.52 to $0.026 on a quarterly basis.
Yes, the markets are efficient, and no I didn't look at KNOP's $0.52 prior quarterly payout rate as "set in stone." But a 95% reduction in the payout was more than I was expecting, and KNOP shares (it's a Master Limited Partnership) were getting crushed. It is a very small position for us in only extremely risk tolerant accounts, so for those clients I will average down today. It's what I have learned from two decades of trading shipping names is the right thing to do. Shipping markets are extremely cyclical.
That said, I am not going to jump on Twitter (TWTR) (I deactivated my account years ago) and scream idiotic platitudes about buying KNOP on weakness. A 95% payout reduction means something. In this case it is that Knot is having difficulty finding employment for its fleet of shuttle tankers that operate in the North Sea (four of its 18-ship total, the other 14 operate in the still-robust market offshore Brazil) and also has an aggressive drydocking schedule for 2023.
So, GOODO and GOODN are still solid and KNOP is worth a flutter after being haircut by a third overnight. But what does that tell us about the overall economy? Two words: not good.
You should be very careful with equity holdings here, especially the Nasdaq. Companies are cutting payouts for the same reason they are cutting employees. Prospects are not looking good for 2023. At Excelsior Capital Partners we don't own a single non-energy-related common stock. I lived through 2008. I remember seeing the warning signs pre-Lehman, and I certainly will not miss them for my clients this time.
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