Wednesday, December 30, 2009


Year end. Time for recaps and predictions. Looking back and looking ahead. Time for resolutions in the two senses of the word: those things that were resolved and those things we promise to address in the future.

Looking back, 2009 was a banner year for most investment categories. Financial markets recovered from the brink of despair, in a move so quick and furious that it offered great opportunity to those who remained alert, while those who passively stuck with their positions throughout could still find comfort in meaningful recovery. On the other hand, those investors who bailed out of the crisis at the wrong time, found themselves longing for those opportunities which passed them by, while they scoffed with skepticism or cowered with fear, unable to pull the trigger and return to the game.

Risk taking was richly rewarded, as the pendulum, which had swung high in favor of safety in 2008, came rushing back in the opposite direction. Playing defense was a losing game this year.

Two of my favorite categories: high yield fixed income and emerging markets, were the hottest tickets of the year. Russian Bonds, for example, with a little bit of both characteristics, were a great place to be.

On balance, it was terrific year for me personally also. My health improved, my family has been wonderful and Uncle Sam is going to smile when he gets my check next April. My clients are very happy to have heeded my advice. Vision and/or luck? A little of both perhaps, but does it matter?

I also had the opportunity to strike a few things off my “bucket list”. Check out the picture at the top. I’m sure you’ll recognize the place. (If not, please rent the whole Indiana Jones series).

The Stanford affair was perhaps the icing on the cake (my 15 minutes?). Aside from the excitement and the attention, it was a messy issue that helped put things in perspective for me. Everything can change in a minute, so don’t take anything for granted. I still follow the case but stopped writing about it. Maybe I’ll do a book about the whole ordeal some day. I certainly have enough material and it’s the only way I can think of to get on “The Daily Show with Jon Stewart”. Nowadays everyone writes a book. Even Sarah Palin!

Looking forward to 2010, challenges abound (there’s a cliché!). Starting with the markets, the easy gains have been made. I still see some opportunities in fixed income, because the dynamics of that market are still favorable. Low base rates, stingy banks, aging populations with more retirees (looking for income) and a few decades of “underhyping” of the asset class. Let’s face it, the media forgot bonds existed back in the early 80s (the 1780‘s) and are only now beginning to rediscover them.
Equity markets don’t appear so clear to me, although accommodative monetary policy lends little reason for selling. It’s a simple case of “what are you going to do with the money?” I have read a lot of research looking for enlightenment on the issue.

As for New Years resolutions, aside from the 20 pounds I vow to lose (this year I’m serious!), I will try my best to blog more. This humble little blog is receiving some pretty consistent traffic and when you have an audience, even a small one, you have an obligation to it. I’ll blog about the markets, investments and probably a lot about bonds and fixed income. It’s not the idea to “fixate” about fixed income, but while there are millions of blogs on stocks, there isn’t a lot of free commentary about bonds.
I’m going to try my best to make a least a post per week, which may not sound like much, but remember this is not my real job.

So, have a really peaceful and joyful rest of this holiday season, a great year in 2010 and thanks for reading my junk.

Tuesday, December 15, 2009

Online Junk

Since I’ve written quite a bit about fixed income, I’ve gotten some inquiries (well, ONE) about how one goes about trading bonds as an individual investor.
I’ve looked around a bit for some family members and myself and I’d like to share some of those findings.

There are of course, the full service brokers: Merrill, Goldman, Morgan(s), European banks, Asian Banks/Brokers…etc. etc. If you have an account at one of these, you can usually call up your rep and get him/her to get you some bonds. They will mostly likely balk at your request for junk, trying to guide you towards some other lower-yielding safer fixed income alternative. Preferably one that makes more money for them. In the end, if you’re lucky, they will comply to your wishes, after telling you more than once that “the bank doesn’t recommend this” to cover their Armani-draped butts.

When you get your fill, you’ll pay a nice commission, but you may never know exactly what the bond actually cost, since the price was most likely marked up along the way, either by your broker or the dealer(s) through which the bond was bought.

I know this sounds like a rip-off, but dealers make their living working these sometimes illiquid markets and its only fair that they get some compensation for that and the risk of carrying inventory in some of these exotic assets.

Remember, however, that everything is negotiable and since there may not be a “market” per se, it makes no sense to place “market” orders. You can always haggle a bit or limit your bid. And you can always say no. Never forget to use this power.

That certainly sounds like a lot of work and hassle. But if the idea is to hold these positions for relatively long periods of time (years), it doesn’t turn into a job.
The back and forth can be a bit annoying and unless you have a Bloomberg or other access, your rep/broker will usually have a better beat on market conditions than you.

If you are like me, you tolerate this process, but you hate it and avoid it if possible. Which is why I buy my cars used at Carmax where the prices are fixed and I’m not locked into a battle of wits with a salesman, with his children’s new shoes at stake.

And it’s why I’ve been trading stocks online since the early ‘90s (CompuServe, remember that?). There is nothing I like better than a simple click, instead of having to chat for half an hour with some person over the phone, before you can get them to put in an order to buy 100 shares of IBM for the account (or something equally insipid).

Unfortunately, buying bonds online is not as easy as buying shares. But it can be done. If you have experience buying stocks online, you should be able to make the adjustments. If you have never transacted through an online broker, bonds are not the place to start.

For beginners, most of the online discount brokers get their offerings through a platform called “Bonddesk” (, which specializes in odd-lots (less than 1 million) offerings. They may include (or not) other sources. But if you look for a specific bond on several discount broker sites, you will likely find the same offers (amounts) and bids. Prices MAY vary as several of these online brokers add a markup (usually 0.5%) to the price they get through BondDesk.

What you will find are munis, corporates and government bonds. My particular interest is corporates, so I can’t tell you how the munis or government bond trading works (I’ll assume it’s similar).

The offerings are mainly US corporate bonds, although you may find some sovereign and foreign issuer bonds (yes, even Venezuelan Globals) sprinkled in. All in US dollars. You won’t find a Naftogaz or Hong Kong real estate companies’ bonds here (darn!). No Dubai. No Turmekistan.

Online brokers have search tools, with which you can narrow down the offerings. This is particularly useful, since you may be looking for a particular issuer (which has many bonds), maturity, yield etc. This is important, because it is not like stocks, there is not an offer on every single bond. Some things may not be available today (but maybe tomorrow).

There isn’t much room for haggling online, the price on the board is usually it, but some brokers will allow you to solicit an “ask” quote, which on occasion can be better than the executable price on the board. (Here’s a good description of the process. LINK).
If it is a bit complicated, you can call customer service and they will work you through the process of buying and selling.

Now here’s a rundown of the online brokers I’ve used or researched. Not supposed to be comprehensive or a plug for any one in particular and reader feedback is encouraged.

E*Trade Securities. I have been a client for years, so I’m biased, but this online broker has really gone after the retail bond investor and actually advertises the fact prominently on their site. No markups (from the BondDesk offerings) and commissions of $1/bond, with a $10 min and a $250 maximum. There are other brokers offering lower commissions, but not really low enough for me to switch.
The search tool is good and you can even access a particular bond's trading history with a link to the TRACE system.
Investment Grade, High Yield and even defaulted bonds are available for purchase.

Fidelity. From what I’ve seen on the “outside”, the workings of the fidelity online bond site is similar to E*Trades. The price is also $1/bond with a $250 max. Their fee schedule, however, states that below-investment grade bond trades must be placed through a representative, which defeats in part the whole online deal. Their search tool excludes D-rated bonds (defaulted), so these may not be available to trade. (Would you want to? Why not?). LINK

Schwab and TD Ameritrade limit online trading to investment grade bonds (BBB or better). Schwab marks up prices over the BondDesk ask price but has a similar commission schedule to E*Trade. ($1/bond, $10 min, $250 max). TD Ameritrade is just the markup apparently (I called them), but I was told elsewhere that there was a $3/bond commission also. FirstTrade also works on a markup basis.

OptionsXPress isn’t very expressive in the bond market. They offer the fixed income alternative, but at $5/bond with a $14.95 min, and a markup on the price, its obvious from their name what business they are really after. TradeKing is similar.

Interactive Brokers. This is one of best options in terms of commissions. The inventory appears to be BondDesk’s, but the commission is lower: $1/bond on the first 10 and $0.25/bond thereafter, with a $5 min. ($n250,000 is only $70 vs. $250 for E*Trade).

The “problem” with Interactive Brokers is that the interface is a complex trading station and it takes getting used to. Some bonds, which show up on the other brokers search tools may not show up here (I have not been able to find convertibles). And they expect you to trade; so if you don’t you’ll get a monthly charge assessed (not much, $10 IIRC).
For my Venezuelan friends, this is an option, since E*Trade no longer opens accounts for Venezuelan nationals. (They say they can’t verify identities…go figure).

Zion’s Direct is another alternative. They claim not to charge markups and there is a flat $10.95 per trade also using the BondDesk inventory. They call the service “Bonds for Less” and they seem to be interested in developing the niche. Only US Residents, however. LINK

A number of online discount houses don’t even bother with bonds: Zecco, First Trade, Sogotrade and others are not interested. They are after the stock day traders.

In conclusion, the retail investor CAN find a way to trade some corporate bonds online. It’s not easy, but it can be done.

The retail fixed income online trading landscape seems to be evolving and we should see changes as investor interest picks up. We could compare it perhaps to online stock trading circa 1992. Ah…who can forget those modem connection tones!
If so, we can expect it to evolve and the market for bonds and credits in general could become more transparent, liquid and accessible (although it may not be in Wall Street’s best interest).

One reader pointed out to me in my blog about my wife’s junk bond portfolio: Why bother? Just buy a bond fund and be over with it. Let someone else bother with defaults, tenders, calls, bid/ask spreads, credit ratings and the like. I promise I will get to that post. This one is already too long.

Friday, December 11, 2009

CIT: It Lives!

Back in August, I blogged about CIT, the middle market financing company which was facing trouble funding its operations. It was a case of an apparently solvent company with a flawed business model.


There was an interesting bond trade to be made, with CIT paper (many maturities and options) at below 70 cents on the dollar and as low as 45% for some maturities. It seemed like a decent wager at the time.

Well, after a relatively short 3 months, in which the company struggled with funding options, reorganization plans and dissident bondholders, and in the end settled for pre-packaged Chapter 11 bankruptcy, CIT emerged yesterday Dec 10 (after only 38 day in Chap 11). LINK.

My old bonds were replaced with new notes, laddered with maturities from 2013 to 2017 plus some NEW CIT shares. In all, the market value today of that package is about 80 cents of the original par value of the bonds. So, chapter 11 and all, if you tossed a few coins at this opportunity in August, today your bet is looking good.

However, if you opted for CIT shares, you came up with snake eyes. Those are worthless, as is the US government’s $2.3 billion TARP investment made in 2008. LINK.

And of course, if you are an original CIT note holder, you may not be happy looking at those 80 cents, but you’re still better off than having sold before Chap 11 and certainly happy you didn’t tender your bonds to Carl Icahn (who offered to buy them at 65 cents).

The point is that in bondland, default can mean many things, but not necessarily: “ you lost all your money”. So when you read about “default rates”, events may be included which may not be catastrophic. Chapter 11 can be a blessing.

Distress can be a synonym of opportunity, so don’t back down. But don’t be reckless and remember to spread it around.

Disclaimer: I already sold the shares, since I don't have a clear idea of how much the new reorganized company could be worth. The new bonds, which aren't your standard bonds (par value is $1 and interest is quarterly), have traded well, so I'll hang on to them for a while.

Thursday, December 3, 2009

All that Glitters…

…is a barbarous relic. In this case, one made out of shiny and precious gold. Gold has been in the headlines a lot in the past months and for good reason: its price has increased well over 30% this year and now stands at or very close to an all time record against the US Dollar (and other currencies as well!)

So just about everyone is saying what a great investment Gold has been or will be in the future. Before you go jump on the bandwagon and exchange your Euros, Swiss Francs or Bolivars for some shiny metal, take some time to read up about gold.

I’ll suggest the wiki page, which isn’t too long and quite informative. LINK.

Here’s my take:

Gold is the ultimate “want” material. Its demand is mainly from “want” and not from “need”. Gold’s limited industrial applications absorb around 300 tons of the stuff a year and it can be readily recycled and usually is, due to its cost. Total demand, however, is closer to 4000 tons a year. Most of that (over 80%) is for jewelry and almost a quarter of that is for India (800 tons). Gold is ideally suited for jewelry since it is attractive and highly malleable. It’s shiny.

However, despite arguments from my wife and Hindu brides-to-be, I think we can reasonably classify jewelry as a discretionary purchase. No one NEEDS jewelry.
Other uses include coins and bars. People buy these and stuff them in safe deposit boxes.

So basically, humans buy gold to hoard it. In jewelry boxes, in safe deposit boxes, in our temples, in our (OMG) central banks or buried under the sand on a tropical island.

An alien visiting our planet would find this behavior amusing (Spock says “illogical but fascinating”), but it’s something our cultures have been doing for centuries. National Geographic estimated that humans in our history have mined 161,000 tons of gold. It sounds like a lot, but since Gold is so dense, that’s only about enough to fill two Olympic sized swimming pools (again wikipedia is the source). It’s all hoarded or hidden somewhere.

Extraction of gold is running about 2500 tons a year, so there is a deficit of about 1500 tons a year, which is satisfied by recycling the gold in those two swimming pools. People (and I mean humans) will pull out their heirlooms, raid someone’s temple, find a buried treasure or simply sell their stash.

These market dynamics make Gold (and its poor cousin Silver), prime material for bubbles. Why? Because humans are greedy. Although the rational behavior of “homo economicus” would be to demand less gold when the relative price of it rises, many times it will be the opposite, the expectation of even higher prices will spur more demand and more hoarding.
Given the need for a voluntary recycling of gold stock to keep demand and supply in balance (and prices in check), small changes in behavior can cause major price swings.
Add in speculation, and you have all the ingredients for a bubble. One thousand tons of gold today are “worth” about $40 billion. A few hedge funds, some changes in allocation recommendation by some global players and you can add that kind of demand easily (or more). Gold futures allow mini-speculators like myself to control thousands of ounces without much collateral, not to mention what the likes of GOLDman Sachs can do.

In those circumstances, there is no upper limitation to price. Put enough players on the buy side of the gold trade and the result could be anything. Two thousand dollars, five thousand dollars. Whatever. Think Dot-Com circa 2000, Housing Circa 2007, Beanie babies, Tulips, etc. or….GOLD itself in 1979-80.

Goldbugs point to the metal as an “inflation hedge”. There is some logic to this rationale. Since the stock of gold is relatively stable, its value relative to other tradable goods (including stuff people actually NEED) should be relatively constant and unaffected by the high-speed currency printing presses flooding the world with their filthy “paper money”. (Here’s a good link about this).

This argument, however, assumes that people are rational in their trading of gold (sell high, buy low). But of course, if humans were totally rational, they wouldn’t hoard this stuff in the first place (or destroy the environment pulling it out of the ground).

Like it or not, Gold is destined for booms and busts.

Now that I have figured that out, the only rational recommendation would be NOT to invest in gold.

So, don’t INVEST in Gold. SPECULATE in Gold.

If humans are going to be irrational, herd-like and emotional, it would only be logical to try to benefit from that behavior. So trade the bubble.

How? First, forget physical gold. No coins, bars or heirlooms. The problem with these is that you won’t sell them when it’s time to do so. It will be stuck in box somewhere, and you’ll say “I’ll sell it when the market rebounds” or “I’ll get it tomorrow” and then you’ll fight with the dealer or jewelry shop guy over a few dollars. You’ll end up hoarding this stuff until the next bubble comes around, or maybe you’ll stuff it in your sarcophagus.

The other thing is that the gold rally didn’t start yesterday. The price has gone from around $300/oz in 2002 to $1200/oz today. Although I don’t think so, we could be nearing a top. But essentially, either it spikes further from here or it stops. If it stops, then why bother?

So, here is how I plan to play the gold bubble. Options. Normally I don’t buy options (I write them), but this is a place where I’d want to use them.

For example, September 2010 140 calls on GLD (a gold ETF aprox 1/10 price of gold), trade for about $5.75. I’ll buy 10 contracts for $5,750.

If all hell breaks loose on the gold market and everyone piles in, let’s say the price shoots up to $2500. I just turned those 10 contracts into 100 grand. If it all fizzles out, well there goes the Jamaican vacation. But that’s it and I won’t have to worry about finding someone to buy my Beanie Baby…er gold bar.
Classic high risk/high return bet. I like the odds better on this than eighteen red on the wheel.

Disclaimer: Caveat, Caveat. This isn’t investment advice and if you aren’t legally able to absorb it, please close your eyes and erase your memory.

Memory lane: you may have the impression that I don’t like gold. Not so. I made my first “killing”, if you will in the 79-80 bubble. At the time, I convinced my dad to buy some gold at $350/oz. in Sep 79 and piggybacked on the trade. A few months later the Russians, bless their souls, invaded Afghanistan and gold spiked. We cashed out in early 1980 at $620/oz, IIRC, after not selling at $800/oz or $720/oz or $680/oz. (ah… greed). I pretty much forgot about gold after that, but Dad lost precious time and money on silver mining companies and the like. (I lost my time and money elsewhere). Bubbles don’t grow again quickly after busting.

This one took 30 years!