tag:blogger.com,1999:blog-30117278018821131302024-02-23T02:43:22.433-05:00Alex Dalmady's BlogUnknownnoreply@blogger.comBlogger83125tag:blogger.com,1999:blog-3011727801882113130.post-18820083863974820722012-03-31T15:45:00.000-04:002012-03-31T15:45:50.270-04:00*Sigh* No Forest<div dir="ltr" style="text-align: left;" trbidi="on">
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In a move that should surprise no one, Canadian/Chinese forestry company Sino-Forest filed for bankruptcy in Canada yesterday. The timing of the filing shouldn't be a surprise either, since the company was due to deliver its 2011 audited financial statements and also unsurprisingly couldn't find an auditing firm willing to sign off on them.<br />
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Thus, the saga which began ten months ago when short-seller/analyst Carson Block put out a report stating that the company was a fraud, is winding down.<br />
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In the interim, we've seen a famed hedge fund manager (John Paulson) humbled, a kiwi billionaire (Richard Chandler) lose a $100 million+ bet and a committee of Sino-Forest's own directors spend $50 million to investigate itself, concluding in a nutshell that the trees exist, but they're not sure if the company owns them in any way.<br />
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We've also seen a criminal probe by the Canadian authorities, which is likely to end in the conviction of no-one.<br />
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Lawsuits abound, including class-actions against the company (good luck with that), the former auditors (Ernst&Young), directors and executives. Not to be outdone, Sino-Forest is suing Mr. Block for $4 billion dollars. As one internet poster put it "That will teach him to expose fraud".<br />
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The lesson here, children, is not that fraud doesn't pay, It's that you have to do it right.<br />
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Be sure to set up in impenetrable and incompatible jurisdictions. When you're exposed, deny, deny and then deny some more. Countersue your accusers and/or the authorities. Pay yourself millions to investigate yourself, giving time to put your person and your assets well out of reach of those greedy lawyers and their needy victim clients. Blame your boss or your subordinates.<br />
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Remember, the truth will not set your free. The opposite is much, much, more likely. /sarcasm</div>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3011727801882113130.post-9044898210757585752012-03-06T17:47:00.003-05:002012-03-06T21:28:42.376-05:00Stanford Bowled Out<div dir="ltr" style="text-align: left;" trbidi="on">
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It was three years in the making, but this morning in Houston a jury found Robert Allen Stanford guilty of 13 charges of conspiracy, obstruction and fraud, stemming from the operation of Antigua-based Stanford International Bank.<br />
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For a while there, I was wondering if "Sir Allen" was going to weasel his way out of this one, the same way his scam escaped detection for over two decades: hiding behind lawyers and other highly compensated professionals. Just yesterday, it had been announced that the jury was split on some issues. Apparently, that was only splitting hairs. Like many, I followed the trial on twitter (great job by the Houston Chronicle and KUHT...still going on at #stanfordtrial). Some the defenses expert witnesses' declarations were to put it mildly: "far away from conventional wisdom". It's amazing what a few hundred thousand dollars in professional fees can do to your technical knowledge base.<br />
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Luckily, the jury didn't pull an OJ, and took the evidence for what it was worth.<br />
On the side of the prosecution they showed detailed confession by a co-conspirator plus a money trail backed by documental evidence. Stuff that you just can't make up.<br />
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On the side of the defense, a two pronged alternate theory: that CFO James Davis worked alone or that there wasn't really a fraud. They brought in experts to state that taking out $2 billion in loans from your own bank (fraud), not disclosing the fact (fraud squared) and flatly denying any loans to anyone (fraud cubed) was all Ok. What's more, everything would be made right again when the pieces of the Stanford empire were put together in a "consolidation" plan. As if consolidating several piles of crap would yield something other than a larger pile of crap.<br />
They didn't address the shortfall in investment returns, which was what gave the whole scheme away ultimately. Anyway, the jury didn't buy it. Unfortunately, we taxpayers will still have to pay for those experts' "work".<br />
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Naturally, this is not the end of the Stanford saga. There are still the criminal trials of the Chief Investment Officer (Pendergest-Holt), the accountants (Lopez and Kuhnt) and the Antiguan regulator (King), in addition to the certain appeals for Stanford and perhaps others. It does seem that if there were others in on the scheme, they mostly likely will get away. <br />
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For those who were caught in this web and lost their money, the journey towards closure is far from over. A trial currently taking place pitting the SEC vs. the SIPC, may give relief to some or perhaps yield just another disappointment. In the meantime, the process of asset recovery in Antigua and the US, has been so far fruitful only to the legal scavengers, for whom time is money and delay is profit. For now, investors have only received frustration.<br />
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So Stanford now joins Madoff, Rothstein, Nadel, Pearlman and many others in the Ponzi Hall of Convicted Felons.<br />
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He did manage to beat one of the wire fraud charges, the one relating to the purchase of Super Bowl tickets for Antiguan Regulator Leroy King in 2006. That botched my plans for a blog title reading "Stanford Bowled for a Duck".<br />
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Cricket fans would get it.<br />
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<br /></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3011727801882113130.post-60930145029750806332012-02-15T08:25:00.002-05:002012-02-15T08:27:05.325-05:00Crowdfunding gets its game on<div dir="ltr" style="text-align: left;" trbidi="on">
(My daughter Astrid brought this to my attention. I found it interesting and asked her to write a Post about it. Enjoy!).<br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">On Wednesday, February 8th</span><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">, 2012 at 8:52 pm, the gaming world and the world of publishing any kind of media tilted ever so slightly on its axis. The main culprits of this shift are a small California based video game developer known as Double Fine productions and almost 50,000 fans and gamers who banded together to make the change.</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">For those of you not familiar with the gaming world, game publishing is a risky and unwieldy beast. Games, especially big name mainstream titles, take a lot of money to make and most publishers would never want to back a project doesn’t have 100% certainty of paying back the funds they’ve dropped into it.</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Right here is where <a href="http://www.kickstarter.com/">Kickstarter</a> steps in. For those of you who haven’t heard of it, Kickstarter is a webpage that brings creative projects out into the public eye and allows people to crowd-fund them. Projects range form comic books, to documentaries. The amounts requested vary small $1,000 projects to much larger projects up in the hundred thousand range. The projects don’t receive the funds until the goal has been met and once the project is complete, depending on how much you donated, you might get a sweet little bonus for helping them out. It’s a small, but useful set-up for creative people to be supported by the internet at large.</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">So when Double Fine Productions decided to ask for $400,000 in order to produce an old school point-and-click adventure game and a documentary about its creation, they didn’t expect much. Point-and-click adventure games are considered a ‘dead’ genre in the games industry. According to the industry, these games don’t sell, so in turn they don’t get funded or get made. At best, the company was hoping to barely reach their goal and be able to produce a game, realistically, they barely expected to make $2,000.</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">But the internet has a mind of its own and once word got out, things got off the ground in a very big way. Within 8 hours, the<a href="http://www.kickstarter.com/projects/66710809/double-fine-adventure"> Double Fine Adventure</a> project had reached its intended goal of $400,000. In 24, they’d climbed all the way up to $1,000,000. That’s one million going towards a game for a ‘dead’ genre, a genre the mainstream doesn’t care to even touch.</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">At the time of writing, there’s still almost a month left to continue to fund the project and once the money is assigned, Double Fine is looking at almost $1,800,000. And that number is still climbing.</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Admittedly, a lot of the success of the project can be attributed to Double Fine’s impressive pedigree (Founder Tim Schaffer is a huge name in the point-and-click gaming world, and their staff is a veritable all-star lineup for this sort of project) and its loyal fan following (who are still waiting patiently for Psychonauts 2, if anyone out there is listening).</span><br />
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<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: small;">But despite that the impact of this on the gaming community, and any creative medium, is almost mind-boggling. Kickstarter had already been funding smaller independent projects, but this proves that it can be done at a much larger scale. It could open up a new avenue of pay-to-create media that would take a lot of gamble and guesswork out of a normally outrageously risky project. Double Fine proved that if there is an audience, funding can be found, and it changes the basic way we can think about something being a risk, or sellable, or viable, or anything. The internet is changing the world, my friends, and I like the way this looks.</span></div>
</div>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-3011727801882113130.post-77520697446597183562012-02-12T19:46:00.001-05:002012-02-12T19:48:01.063-05:00Reverse Combustible<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="letter-spacing: 0px;">FINRA has recently launched a probe into what they are calling yield chasing instruments, among which are derivative-linked CDs. </span></div>
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<span style="letter-spacing: 0px; text-decoration: underline;"><a href="http://www.bloomberg.com/news/2012-02-07/finra-examines-cds-tied-to-derivatives-as-banks-increase-sales-to-a-record.html">http://www.bloomberg.com/news/2012-02-07/finra-examines-cds-tied-to-derivatives-as-banks-increase-sales-to-a-record.html</a></span></div>
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<span style="letter-spacing: 0px;">Banks have been selling a lot of these products, which tend to be quite profitable for them. Here’s a short explanation of a popular product called “reverse-convertible”, “barrier” or “knockout bond”, so you can understand why these are popular with the banks.</span></div>
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<span style="letter-spacing: 0px;">The standard Reverse Convertible product works something like this:</span></div>
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<span style="letter-spacing: 0px;">Joe, a 65 year old retiree. is looking to invest $1 million, but is unhappy with the yields offered on short term CDs and other similar products. So his banker or broker offers him a "reverse convertible", sporting a 10% yield over six monhs with stock XYZ as underlying and subject to certain conditions. Joe is enticed by the yield and buys in. </span></div>
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In six months, Joe expects to get his $1 million back plus $50.000 in interest. Those $50.000 are normally to be paid regardless of what happens to XYZ. </div>
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The principal, however, is only guaranteed if certain conditions are met. In this hypothetical case, the condition is that XYZ, which is currently trading at $20, doesn’t trade 20% lower at any point in time during the 6 month period. That is, if XYZ trades at $16 or lower, even briefly intraday, the “knockout” feature is activated and the instrument is no longer principal-protected.</div>
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<span style="letter-spacing: 0px;">Once the knockout feature is activated, it means that instead of Joe getting his $1 million back, he might get 50.000 shares of XYZ instead (its the banks option). </span></div>
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<span style="letter-spacing: 0px;">Since XYZ is a nice company and Joe doesn’t think it will go down that much, he invests, thinking that the bank is dumb to give him such a great deal. Ten percent interest in these days of low yields is great, right? And in the worst case, he gets some shares in a great company like XYZ. </span></div>
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<span style="letter-spacing: 0px;">Ah, but the bankers smile, because they have this covered. Here’s what they do:</span></div>
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<span style="letter-spacing: 0px;">They sell puts 6 months in the future at that $16 strike. Five hundred contracts, which should net them at least $1 each, possibly more. That’s $50.000 for those who are doing the math. That covers the interest that needs to be paid to Joe when his product matures in 6 months. So in case XYZ stock behaves nicely and Joe’s bet pays off, the bank doesn’t lose a cent. They also have $1 million to play around with for 6 months, so you can assume they make some interest on that, too. </span></div>
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<span style="letter-spacing: 0px;">Of course, if XYZ tanks, Joe stands to lose some serious cash . Let’s say it goes down to $14.The bank will get its puts assigned buying 50.000 shares at $16 per share which they will give to Joe in exchange for his million dollars. Net profit for the bank: $200.000.</span></div>
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Net loss for Joe is $250.000: the $300.000 in lost market value for his shares of XYZ minus the $50.000 in interest he collects. </div>
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<span style="letter-spacing: 0px;">If XYZ closes somewhere between $16 and $20, the bank can still make a tidy profit, if somewhere along the line XYZ traded under $16 triggering the knockout provision and allowing the bank to assign the shares to Joe at $20/sh. In this case, since the stock has settled above $16, the bank would buy the shares in the market and then “sell” them to good old Joe at the agreed upon $20, earning the difference.</span></div>
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Of course, if the stock trades higher, or never breaches the $16 limit, Joe simply collects his interest and the bank might make a small profit. But Joe now feels like a winner, and armed with his new "knowledge", you can be pretty sure he's going to try his luck again on one of these products. He'll probably lose one of these bets eventually, and even if he doesn't the bank is still making small profits on each sale. </div>
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<span style="letter-spacing: 0px;">Naturally, there are numerous variations of the product, including with multiple strikes and underlying instruments. The underlying doesn’t have to be a stock, it could be an index, or a commodity. If the bank doesn’t have the product you want, if you have enough cash, they will build it for you. That’s how much they like these things, and after this explanation it should be clear why.</span></div>
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<span style="letter-spacing: 0px;">Of course, times are hard for yield-seeking investors and many opt for these products, given the dearth of interest-producing alternatives. And to make a little, you have to risk a little, right?</span></div>
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<span style="letter-spacing: 0px;">Perhaps, but the problem is that the investor is bearing all the risk here and reaping only a fraction of the potential reward. If he were to sell those puts himself, he could pocket the $50,000 premium and tell the bank to take a hike. Heck, he doesn't even need to put up the whole $1 million in collateral.</span></div>
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What’s more, his risk in XYZ stock would be lower since the puts are assigned at $16 (as opposed to $20 in the RC) .</div>
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<span style="letter-spacing: 0px;">Ah, but selling naked puts is complicated and brokers and regulators (including entities like FINRA) feel that Joe, who isn’t all that sophisticated, shouldn’t be allowed to take on that risk. So its not something that fits with Joe's profile and if a broker puts him in that trade (the naked put) and it goes wrong, he (the broker) could be looking for trouble. </span></div>
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<span style="letter-spacing: 0px;">They have little problem, however, with Joe buying a reverse convertible. “Go ahead Joe. Knock your self out with a knockout bond”. </span></div>
</div>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3011727801882113130.post-74889766443479609712011-11-17T08:55:00.001-05:002011-11-19T09:05:08.089-05:00In Jefferies we Trust.<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8kXa78wsPrxpjbYLAMZ9RBM-QjKtyUs5YDEUyuTqhbBef81grWbr-quyr7uCdCtfrluVzhdLA4r8pmNRBeUclvL3pBPnOQu7vzSCakLHZ7tF_G7dQJCB2oyuFaTWwOUouJo8TJyACrCs/s1600/mfg_logo.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8kXa78wsPrxpjbYLAMZ9RBM-QjKtyUs5YDEUyuTqhbBef81grWbr-quyr7uCdCtfrluVzhdLA4r8pmNRBeUclvL3pBPnOQu7vzSCakLHZ7tF_G7dQJCB2oyuFaTWwOUouJo8TJyACrCs/s1600/mfg_logo.png" /></a></div>
With the Euro crisis as a backdrop, as opposed to the housing/mortgage crisis of 2008, this year's Lehman Brothers has been MF Global, a medium sized commodities broker-dealer, spun off from Man Group a few years ago and which had actually purchased the business from REFCO back in 2005.<br />
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REFCO, as many may remember was the subject of a famous meltdown of its own. </div>
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MF Global's demise came reportedly due to large leveraged bets on European sovereign debt which didn't pan out. That's tough for MF's stockholders and bondholders, who are probably looking at steep losses.</div>
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Here's the graph for MF's 6.25% 2016 bond, issued in August 2011, which basically fell off a cliff in two months.</div>
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Like Lehman, MF Global's debt was "investment grade" (Fitch, S&P and Moody's), right up until the nasty stuff hit the fan in late October. Of course, MF was just a triple B, as opposed to a Lehman's AA at the time of its collapse, so I guess we're getting better in the ratings biz. Off topic, this is why I really don't invest a whole lot in debt of financial companies. Very difficult to analyze and foresee these meltdowns. </div>
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Still, if it were just the stock and bondholders losing, no biggie. The problem is that the issue is affecting customers also. When brokers go down, customers don't normally lose their money or securities, because these assets are (or should be) segregated and separated from the broker's own. It can be a hassle to get everything set up again at new broker/dealer, but competing firms are normally more than happy to bring those customers on board. Sure beats wining and dining them.</div>
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The problem with MF is that apparently those customer funds were not well segregated. There is a reported $600 million "missing" from customer accounts. Big problem. </div>
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First off, this isn't supposed to happen. You'd figure that this was a lesson learned from the Madoff scandal (BLMIS was first and foremost, a broker-dealer). Second, this didn't happen with Lehman, where customers were taken over by Barclays and their assets were there. It didn't even happen with Stanford Financial's brokerage arm (other stuff happened there).</div>
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So, big black eye for regulators once again. Hopefully the money shows up, but this is kind of like with missing persons. After three weeks, the chances aren't good.</div>
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This leads us up to the old crisis equals opportunity adage and the title of this post: Jefferies (JEF). Jefferies is a mid-sized broker-dealer. Not a household name, but well known and regarded in the industry. While checking the company's Sec filings, an analyst at Egan-Jones noticed that the company was long European sovereign debt in an amount equal to close to 80% of JEF's equity and proceeded to downgrade. </div>
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The company said "Whoa, wait a minute. We make markets in those bonds and we're short (as in we have to deliver to clients) pretty much the same amount." (they didn't actually say THAT, but that was the message). JEF even went as far detailing positions and showing how they could change their inventory levels if the wish too. In short, JEF pretty much did everything right to control the damage. (Frankly, if you used this same yardstick, where does that leave every European bank?)</div>
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However, stock and bond traders have not been understanding and much less forgiving lately and JEF's securities have sold off sharply, opening up what appears to be an opportunity. On the very short end,</div>
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JEF's 7.75% 2012 bonds (due March 1) are trading below par, for what would look to be nice pickup for less than four months. On the other end, some of the longer dated maturities are yielding at or close to double digits. JEF is still "investment grade" (FWIW, I know).</div>
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While the selling could still get worse, I like the odds on this one and am willing (and have) put down some coins on JEF bonds. Drawing on the 2008 parallels, buying Morgan Stanley or Goldman Sachs bonds while Lehman went down in flames, proved to be an excellent investment. We'll see how this one goes. With 2012s, we'll know soon enough. For the long run, the broker-dealer business model is obviously "under review". Bear, Merrill, Lehman and now MF can't all be aberrations. For now, however, "In Jefferies we Trust". </div>
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</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3011727801882113130.post-60339581617438732102011-08-29T10:19:00.000-04:002011-08-29T10:48:04.858-04:00Sino Forest Epilogue<div dir="ltr" style="text-align: left;" trbidi="on">
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Since I already did two posts on Sino, might as well make it three and out.<br />
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Last Friday, the Ontario Securities Commission suspended trading in Sino Forest stock, alleging that the company may have defrauded investors by exaggerating its profits and assets.<br />
Initially, the order also called for the resignation of the company's CEO Allan Chan and other officers and directors. That portion of the order was then excluded (apparently the OSC doesn't have such authority), but the CEO and several others resigned anyway.<br />
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This would appear to be the argument that ends the discussion concerning this case. But you never know, there are always dissenting opinions and conspiracy theorists. This announcement followed a flurry of news which included a very strange second quarter earnings report in which the company's erst-while rock solid operating margins evaporated, a three-month delay of the "independent review" and downgrades from the major ratings agencies.<br />
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Carson Block is looking like a champ. For his part, John Paulson took his lumps like a man. It was big loss for his fund, but he showed he could recognize when he was wrong.<br />
I do feel for the analysts who came out to support the company. Lesson learned, hopefully. Don't trust everything they tell you, sometimes the numbers are simply a lie. Company officials are NOT your friends.<br />
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As for the bond angle, there is a bright spot. On Aug 17, Sino paid its 2011 bonds in full. So whoever took a flier on that trade I mentioned in my previous post, made out like a bandit. I wasn't that brave.<br />
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Sino stock may be suspended, but the bonds can be traded OTC, as far as I can make out.<br />
My Bloomberg is indicating a 26 bid on the 2014's (the ones I luckily sold at 72). Ouch!<br />
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Unknownnoreply@blogger.com8tag:blogger.com,1999:blog-3011727801882113130.post-64635109490689288072011-06-15T08:30:00.010-04:002011-06-15T15:02:50.919-04:00Battle Lines Drawn in the Forest<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2DscZkKz22PCW892IS0Ox5fYqzGh48MiE2tjLZwOguuqkco4MtzALMFpFr_XYHUCysJw7vkCJE__-Ng350nAe8IYFDV6iKphPHiGrhxON67eZLjxFUrLSvl9QPfLGDx1JkbIPH-B0ewE/s1600/forestinchina.jpg" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="240" width="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2DscZkKz22PCW892IS0Ox5fYqzGh48MiE2tjLZwOguuqkco4MtzALMFpFr_XYHUCysJw7vkCJE__-Ng350nAe8IYFDV6iKphPHiGrhxON67eZLjxFUrLSvl9QPfLGDx1JkbIPH-B0ewE/s320/forestinchina.jpg" /></a></div><br /><br />It’s been almost two weeks since Carson Block's Muddy Waters report on Sino-Forest accusing the company of fraud. <br /><br />I’ve been following the case even though I no longer have stakes in the game. There has been an interesting back and forth going on in the comment section of this blog and on other message boards. So here’s another post so that discussion can continue.<br /><br />A few comments on where I think things stand.<br /><br />1. The MW report<br /><br />Substance aside, the report is poorly written. It’s self-serving. (Example: “Were Muddy Waters not to have come along, it is likely that this fraud could have continued for a few more years and billions of dollars more” – is this really necessary?). That lowers its value.<br /><br />There’s information that is irrelevant to the company’s current situation. For example does some deal gone bad in 1994-96 have any bearing on the company’s value today? Probably not, it’s only there to establish a “pattern” of deceit. Lumping all this together in the report is confusing. <br /><br />But the main elements of the fraud theory are there. The con itself: inflating profits and assets. The mechanism of that fraud: the use of opaque and undisclosed “authorized intermediaries” to fabricate transactions and profits, instead of selling directly (which would leave a paper trail). Finally, the cover up: a convoluted corporate structure to distract the auditors and manipulating the valuation process of its forests.<br /><br />That’s MW’s theory. It’s not outlandish and certainly we’ve seen bolder scams go undetected for much longer. It could be wrong, of course, as is the case with every theory.<br /><br />Now a lot of people are asking MW to “prove” their theory. That’s tremendously unfair. To do so, MW would have to have access to all of Sino-Forest’s records and books and be sure they were the “real” ones. That’s not going to happen. <br />They also can’t ascertain completely the scale of the scam, for the same reason. It could be that MW’s right and billions in assets are missing, or it could be more (or less).<br />The report says as much (“…without the aid of law enforcement, we will never really know how much money is there or where it went.”). You can’t fault them for that either.<br /><br />What MW did was look at the evidence and put the pieces together for their theory (feathers, waddle, beak…hmmm). <br /><br />Mr Block is being “made the villian” by those on the other side of the trade, which again, in my opinion, is unfair. Among other things there is a line of thought, that regardless of the outcome of investigations, Sino-Forest has been “mortally wounded” by his allegations.<br /><br />Now, frankly the whole idea that you can “destroy” a company by spreading “false” rumors or information is hogwash. If the information turns out to be incorrect, then the company was what it said it was, and the markets will value it accordingly. If the allegations are true, a fraud has been exposed (hard to see the downside in that!). Even financial institutions, which are deemed to be more sensitive to “breaks in trust”, usually bounce back quickly once the air has cleared. <br />Sino-Forest’s stock has tanked. But lets be clear, a stock price does not a company make. Certainly not in the short run.<br /><br />2. Company Rebuttal<br /><br />After initially ignoring the allegations, the company took steps to address the situation. To look into the allegations they appointed an independent committee. That committee is only independent in the sense that it is comprised of “independent” (i.e. not working for the company) board members, but hardly “independent” in a third party sense, since those directors are probably still liable if fraud is present (self-incrimination, anyone?). The committee will be “assisted” by PriceWaterhouseCoopers, which is a good idea since using Ernst & Young, the company’s auditors, who also may be looking at some hot water, would hardly be independent enough. <br /><br />Still, it’s important that PwC produce and sign off on any report for it to have any kind of credibility. Statements by the company or documents produced by the company without any third party independent (really independent) verification are automatically suspect. <br />The report is expected to take at least three months to complete. <br /><br />The company also made some documents and information available to analysts and the public, but kept secret about others, such as its customers’ names and the location of its forests. That’s ok. They have no obligation to disclose this information to analysts or anyone else. When regulators and auditors come knocking, however, that’s a different story. <br /><br />3. Others Chime in (or not)<br /><br />The analyst at RBC Capital Markets, Paul Quinn, came out Friday (June 10th) with a very favorable opinion (Outperform – Evidence mounting in Sino’s Favour). Another analyst Richard Kelertas at Dundee (Canadian Firm, recently acquired by Scotiabank) called the MW report “a pile of crap” and was quite adamant in his support of the company (“we believe in the company, we trust the company). Of course, these guys have their reputation at stake since they have been following and recommending the stock for years. Since 2004 in Kelertas’ case and RBC has had an outperform on the stock since May 2009. Both firms reportedly did underwriting for Sino in its 2009 stock offering. <br /><br />But they are not the only ones who did business with Sino. Credit Suisse, Merrill, Morgan Stanley and others were bookrunners on Sino bond and stock deals. So you can’t really use that as a rationale for the analysts’ positions. No, these guys truly believe what the company is telling them. I can relate. When I worked as an analyst there were some companies I followed for up to ten years and weren’t followed by anyone else. The execs knew me and I knew them. They’d show me the installations, tell me anecdotes and give me certain information that would never be “on the record”. Friends? Maybe. There was a certain empathy. The work’s easier when it’s not confrontational. But let there be no doubt about it, they would lie to my face if that’s what was their interest. And they did. After you get duped a few times, you learn to be a little less trusting and keep some distance. <br /><br />Other analysts have been somewhat more skeptical. Annisa Lee, an analyst at Nomura Securities had put out a skeptical report already several months ago, well before the MW report. (and was reportedly cut off at today’s conference call). Morgan Stanley’s Vivien Gui also released a note (which didn’t get much press from what I see), which was called “my unanswered questions” and spotlighted doubts about the company’s scale, the location of its forests and the business model. <br /><br />Then there is the enigmatic presence of Paulson with his large position. He is obviously attentive to what is going on, and reportedly has been supportive of the company. Unfortunately, he is “trapped” in a sense. Here’s why: my first impression was that Paulson should get his hooks in the committee and in the investigative process, to better assess where he stood. Ah, but by doing so, he would become an “insider” with the legal implications that that entails and thereby freeze his position. So, aside from laying blind bets in either direction, Paulson doesn’t really have any option but to wait. <br /><br />At this point, the only ones who really know the situation are the company insiders. That is probably only a handful of execs. If there is fraud, the outside directors are probably clueless. (I’ve been on boards, the information you get is distilled more than a good scotch whisky). Ernst & Young, the company’s auditors, should know by now if they have been duped. You can bet that the first thing they did when this broke was to call in the Sino audit team and go over every sampling and every piece of independent verification that may be missing or suspicious. If something important got past them before, they now know what it was. Unfortunately since E&Y’s nuts are in the boiler, they won’t utter a word until they have checked and re-checked EVERYTHING. Don’t expect them to talk anytime soon. But they know…already. <br /><br />4 The Bond Angle<br /><br />Sino’s stock hit a new low today, but since I like to blog about fixed income and there aren’t a lot of bond blogs out there, I thought I’d chime in on some interesting movements in Sino’s bonds.<br /><br />The 2014 bonds which my clients held (and the 2017s which they didn’t) have stabilized in the 60-70% range since their initial fall. One could interpret that as players assessing the best case scenario (no fraud full recovery) and the worst (partial recovery even if stock goes to zero) and looking for some middle ground. <br /><br />2014 Bonds<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs0sEUZ4hVx4H91u480EMjdKKbMWJoMmJ2xPyaq67DBQjoADzg5EWX3jXftKwU3QR4NYTWvP4dowh0Nm7PrvIVQUfz2eUhLXcLhjRAmwUl7CVXUqtsdyhV0MbSn9HvgHhDZM4ayrEQA18/s1600/TRECN14.jpg" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="160" width="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs0sEUZ4hVx4H91u480EMjdKKbMWJoMmJ2xPyaq67DBQjoADzg5EWX3jXftKwU3QR4NYTWvP4dowh0Nm7PrvIVQUfz2eUhLXcLhjRAmwUl7CVXUqtsdyhV0MbSn9HvgHhDZM4ayrEQA18/s320/TRECN14.jpg" /></a></div><br /><br />The 2011 bonds, however, have rebounded sharply from a low in the 60% range to a recent price of around 90%. There would appear to be another dynamic weighing in this case. These bonds are due Aug 17 and there is only $87 million outstanding. Therefore, even if investigations finally reveal that Sino is a fraud, there’s a good chance these bonds could be paid before the results of those inquiries come to light. A play on the lack of expedience of the due diligence, if you will. <br /><br />2011 Bonds<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWbmcuTCG7T8Bd19zHWL-noVYABwtqysF3rgZHlm8cuVMjkshy7Jtn9gJYlrDZw354w1a8qSKCSGLx7g5DLLuDucCtT1BjkT16W4vGoZIPFFLjZ4hIyMxOp_cryw95-PQbxE2sZqnkQqs/s1600/TRECN11.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 167px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWbmcuTCG7T8Bd19zHWL-noVYABwtqysF3rgZHlm8cuVMjkshy7Jtn9gJYlrDZw354w1a8qSKCSGLx7g5DLLuDucCtT1BjkT16W4vGoZIPFFLjZ4hIyMxOp_cryw95-PQbxE2sZqnkQqs/s320/TRECN11.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5618424094919640354" /></a><br /><br />I’m not recommending it, but there’s is an alternative for Sino bulls to simply going long the stock, if you want to take it. <br /><br />That’s where the Forest stands (or doesn’t) at this time. The other comment thread was getting too long, so please continue that fine discussion here. Go at it, just keep it civil.Unknownnoreply@blogger.com28tag:blogger.com,1999:blog-3011727801882113130.post-65711653653837115292011-06-06T17:10:00.003-04:002011-06-07T09:46:53.507-04:00Bitten by a Chinese Duck<div dir="ltr" style="text-align: left;" trbidi="on"><!--StartFragment--><br /><div class="MsoNormal">Sometimes you see a duck for what it is. Sometimes you take it for what it tells you it is.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">The story of the week and perhaps the year is Sino-Forest. This is a Canadian-listed stock, but the company has forestry operations in the Peoples Republic of China.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Last Thursday, a research group called “Muddy Waters” put out a 39-page report on the company, stating in no uncertain terms that the company was a fraud. The company also has no qualms in saying that they are short the stock, and stand to gain financially if their allegations prove true.</div><div class="MsoNormal">Here is their website. You can download the report. <a href="http://www.muddywatersresearch.com/"target="blank">Muddy Waters</a></div><div class="MsoNormal"><br /></div><div class="MsoNormal">This case got my attention for an obvious reason: I have stakes in the game. For disclosure purposes, a few of my clients owned some Sino-Forest bonds (10.25% 2014s). Bonds are rated BB by S&P, which makes them junk, but really good quality junk (two steps away from investment grade). </div><div class="MsoNormal"><br /></div><div class="MsoNormal">I went back over my notes to see why we bought these bonds back in 2009. Actually we didn’t buy these in particular, but received them in exchange for a shorter maturity paper. Anyway, at the time it looked like a good deal. The company had a very strong balance sheet including a great amount of cash, plus solid and consistent earnings. Those earnings are what struck me as the most positive, because I used to work for a paper company and I know a little about the industry. It’s a tough industry to make money in consistently. But Sino-Forest did and with very strong margins, so more power to them. Financials were audited by Ernst and Young, a big North American firm, so despite being a Canadian Firm born from a "reverse takeover, I thought it was ok. So I laid some coins down for my clients. Not a large bet, by any means. We always diversify a lot. Because stuff happens. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">So now this report comes out. The stock plunged (although today it’s on the rebound). Bonds plunged.<span style="mso-spacerun: yes;"> </span>I downloaded the report and went over it on the weekend. I won’t lie and say I understand every detail. But there is a lot there. Mainly, an explanation of why those profit margins were so generous (they’re false!). Plus there are details about why certain representations that the company makes about its operations, such as size of the plantations, volume of sales, etc. are not realistic. It’s a very complete report.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">The company is out today in full denial, offering details about their assets, including the original titles to their plantations. Questions have been raised about the authors of the report and their motivations. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">After reading the report and looking over my notes, I fully expected to not being able to unload my clients’ bonds this morning. But lo and behold and bless the market makers souls, there was a market for them this morning, and I managed to unload them at 72%. Facing a possible total wipeout of the investment, this was a windfall for me and my clients. I am very satisfied. Of course, I could have held on and waited for explanations from the company or some sort of recovery in the case of bankruptcy. I preferred to accept that potential "duck bite".</div><div class="MsoNormal"><br /></div><div class="MsoNormal">There’s good reasons to give credence to the Muddy Waters report and I’ll give a few. I’ve been sort of in these guys shoes, so I can relate. </div><div class="MsoNormal"><br /></div><ol start="1" style="margin-top: 0in;" type="1"><li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">These guys are not hiding.</li></ol><div class="MsoNormal"><br /></div><div class="MsoNormal">This is not a random anonymous blog or post on a message board. Serious time and money was put into this report and the research to make it happen. Please, let's focus on the “what” and not the “who”. When I was being questioned about that bank report back in 2009, the reporters seemed to be more interested in me than what my report was implying.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">The analysts at Muddy Waters have a lot to lose if they are wrong. They face fines, jail time, etc. They are totally in the open on this. They also can't just go and cover their shorts now that they are on the record. They have more than money on the line. They are sure, very sure. </div><div class="MsoNormal"><br /></div><ol start="2" style="margin-top: 0in;" type="1"><li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">It’s a murky business.</li></ol><div class="MsoNormal"><br /></div><div class="MsoNormal">“If it’s so profitable, why isn’t everyone doing it”.<span style="mso-spacerun: yes;"> </span>There are few competitors in the business, but Sino-Forest is the largest by far. Another company China-Forestry, turned out to be (surprise) a fraud. That said, if the business were so good, there'd be more competition and margins would drop at some point. Hasn't happened (according to the company).</div><div class="MsoNormal"><br /></div><ol start="3" style="margin-top: 0in;" type="1"><li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">Too good to be true.</li></ol><div class="MsoNormal">Ah. Those profit margins. Yes, there is great demand for materials in China, and I’d assume that’s true for wood chips. But if your margins are this big, it has to be that you worked your forest for several years (grew/planted). But most of Sino’s forests were recently acquired. You can’t have you cake and eat it too. Either you worked the forest and are entitled to those large margins (the time factor, if you will) or you didn’t and the margins should be lower. You shouldn't be able to make this kind of money by just "flipping" a forest. </div><div class="MsoNormal"><br /></div><ol start="4" style="margin-top: 0in;" type="1"><li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">The Cash, the Cash!</li></ol><div class="MsoNormal">One of the things that drew me to Sino-Forest bonds can also be a great litmus test. The cash. There is supposedly over a billion dollars in cash on the balance sheet. If Sino’s profits are false, that money is going to be missing somewhere. It’s either going to be in the value of the forests or in the cash balances (or both). Of the two, the cash is the easiest to check. If the cash isn’t there, we will know its all a lie. (Have these guys provide certified bank statements? I'd need to see those, ipso facto). </div><div class="MsoNormal"><br /></div><div class="MsoNormal"><o:p></o:p></div><ol start="5" style="margin-top: 0in;" type="1"><li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in;">There is more than what is said.</li></ol><div class="MsoNormal">Although the Muddy Waters report is extensive, it probably doesn't contain ALL of the analysts’ suspicions and red flags. That’s usually the case. You only put down on paper enough to drive your point and what has the best documental support. The research is much more extensive and probably includes a ton of anecdotal information which is not in the reports because you can’t really put down things that don’t “seem” or “feel” right or for which the evidence isn’t totally conclusive. Again, I can relate. That whole picture, however, is what allows them to be comfortable with their conclusions. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">Of course, I don’t know anything for sure, since I didn’t do the work. You never know for sure. Analyzing from the outside is difficult, because you don’t have access to all the information that goes into putting out the company’s financials. You can’t really go asking the company for access either, as in “would you mind if I checked your books for fraud?”</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Nobody likes to accuse anyone else of wrongdoing, even in the face of overwhelming evidence, for many reasons. It’s mean and most good people don’t like to appear being nasty or not giving the “benefit of the doubt” to the offender. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">So here’s the question that I ask when a straight one way or another answer is required: “If your loved one’s life depended on your correct (not politically correct) answer, what would you say?”</div><div class="MsoNormal">With that on the line (which fortunately it is not), I’d lean towards calling Sino-Forest a Canadian/Hong Kong duck. If so, it will set a new standard for Asian Fusion fraud cuisine. We shall know soon enough.</div><div class="MsoNormal">This one bit me. Ouch.</div><!--EndFragment--> </div>Unknownnoreply@blogger.com65tag:blogger.com,1999:blog-3011727801882113130.post-41548732877709123942011-04-17T21:15:00.001-04:002011-04-18T13:12:41.284-04:00From Russia with Bonds<div dir="ltr" style="text-align: left;" trbidi="on">All investors have their favorite themes or "guilty pleasures". In my case, it's Russian bonds. Despite a troubled past and lots of questions about the future, I seem to feel at ease laying down cash on Russian names and enjoy the pickup over counterparts from other parts of the more "developed" world.<div><br /></div><div>This affinity was only reaffirmed during the credit crunch of 2008-2009. When other countries were scraping for answers and cowering from creditors, the Russians showed some pride and put their reserves where their cojones were. Here's the graph:</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLWlgnYRkxVb84Pyh4W5e-fhOuTvzthFO8S390uYnp1DqDY2adATnz98c_vxOfPyd4LwshPVCQl76oG6-MB0itulxvdBLaZD9apk8d8sFq4pNh-lF8hUnEFV5nd3SMZCDer-MYXWFhnHg/s1600/russres.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLWlgnYRkxVb84Pyh4W5e-fhOuTvzthFO8S390uYnp1DqDY2adATnz98c_vxOfPyd4LwshPVCQl76oG6-MB0itulxvdBLaZD9apk8d8sFq4pNh-lF8hUnEFV5nd3SMZCDer-MYXWFhnHg/s320/russres.jpg" width="320" /></a></div><div><br /></div><div><br /></div><div>During 2008, Russia went through about 40% of its international reserves. And while the financial press was portraying that as a weakness, it was quite the contrary. Russia was telling its local entities and companies: "look, if you need dollars to pay off your international creditors, come and get them". That's </div><div>kind of what international reserves are for, after all. They certainly gained the respect of this bond junkie.</div><div><br /></div><div>The yield nowadays are nowhere near what they were doing the crisis, but I still feel comfortable with Russian bonds and will indulge in my "guilty pleasure" quite often. </div><div><div><br /></div><div>For example, in the telecom space, instead of AT&T, Verizon (US) or Vodaphone, I'll take some Vimpelcom or Mobile Telesystems, thank you. With a nice pickup in yield, to boot. (Russians are more cellphone-maniacs than any other country, BTW).</div><div><br /></div><div>In the energy realm, instead of thinking BP, Exxon or Chevron, how about some Gazprom, which is half owned by the Russian government anyway? Or Lukoil or TNK-BP?</div><div><br /></div><div>Want something more exotic or risky? How about Alrosa (Diamonds) or Evraz (steel).</div><div><br /></div><div>Here's a few individual bonds by these issuers. </div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmtS-Mx8OBKjYstMfaRGOflYTgImFGglk3ji05ypREup6_EeEGn2FECo0O3U7b3MGE6dTcAt0HGTxKHxmLAoJTCHV6pztQOzX0ru5VNrnAQ6-_aHS_BL8nLSSDtDBF4IIvxUqNlIJKcTE/s1600/russbonds.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="135" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmtS-Mx8OBKjYstMfaRGOflYTgImFGglk3ji05ypREup6_EeEGn2FECo0O3U7b3MGE6dTcAt0HGTxKHxmLAoJTCHV6pztQOzX0ru5VNrnAQ6-_aHS_BL8nLSSDtDBF4IIvxUqNlIJKcTE/s320/russbonds.jpg" width="320" /></a></div><div><br /></div><div>Finally, here's an excellent clip portraying the history of the soviet union, to the music of Tetris.</div><div>Enjoy!</div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><object width="320" height="266" class="BLOGGER-youtube-video" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,40,0" src="http://3.gvt0.com/vi/hWTFG3J1CP8/0.jpg"><param name="movie" value="http://www.youtube.com/v/hWTFG3J1CP8&fs=1&source=uds"><param name="bgcolor" value="#FFFFFF"><embed width="320" height="266" src="http://www.youtube.com/v/hWTFG3J1CP8&fs=1&source=uds" type="application/x-shockwave-flash"></embed></object></div><div><br /></div><div><br /></div></div></div>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-3011727801882113130.post-46170201278672097502011-01-30T09:33:00.003-05:002011-02-01T15:42:46.755-05:00REG S'ed<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiexpMYbIv1tV6cvAVFMX-AYEh21zfsIIHl-IkapUFBcDdTCzMb0P9sq4WRJGUXN-0JfSn_6s2nnIPr5tgFrcmJ9YZY6AGXVEpmCZ4xJLyIFFaELrfut_Dmf2zec30t9BdU_fV6ue3rpvg/s1600/08d32vampire-squid.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 314px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiexpMYbIv1tV6cvAVFMX-AYEh21zfsIIHl-IkapUFBcDdTCzMb0P9sq4WRJGUXN-0JfSn_6s2nnIPr5tgFrcmJ9YZY6AGXVEpmCZ4xJLyIFFaELrfut_Dmf2zec30t9BdU_fV6ue3rpvg/s320/08d32vampire-squid.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5567991698739082034" /></a><br /><div dir="ltr" style="text-align: left;" trbidi="on"><div class="MsoNormal">A couple of months ago, my wife came into the office to look for some files and thought I’d strike up a little conversation.</div><div class="MsoNormal"><o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“Honey, did you know that Jordan is coming out with some bonds?”<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">I knew she’d be interested since we had visited Jordan in December 2009 and enjoyed the country very much.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“I’d like to buy some” she replied, even though I hadn’t told here what the terms were (not really exciting by the way).<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“Sorry, but you can’t” I answered. “It’s REG S”. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">It’s usually not a good idea to tell my wife she can’t do something, because she’ll just want to do it more. I knew I had to explain. (So here is kind of what I told her. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">What happens is that in order to avoid going through the lengthy, complicated, bureaucratic and unpredictable process of registering a bond with the US SEC, many issuers will do what they call a private placement. They do it under REG S, basically promising that they won’t market or sell the bond to US Persons (citizens and legal residents). So the SEC leaves them alone.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“So I can’t buy it because I’m a US Citizen?” she said.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“Yep” <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“That’s not fair” (you knew that was coming). “This is supposed to be the land of freedom” (and the capital of capitalism, I might add). <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“Can I never buy these bonds?”<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">After a year you supposedly can, but good luck finding them or someone willing to sell them to you. Buying in an initial offering is normally a good deal also; the bonds routinely will trade a bit higher right after they’re issued. Sometimes the issuer will register the bonds with the SEC and make them available for trade on US markets, but they don’t have to.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“What about US companies? I can buy their bonds, right?”<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">No, not really. A lot of those, probably most, are REG S also. Even US companies figured out that it’s a lot easier to go that route and avoid dealing with the SEC. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">I added that big US financial institutions could get in on most of these deals, even if my wife couldn’t, through a rule called 144A, which allowed “Qualified Institutional Buyers” or QIBs (not to be confused with Squibs, which are sons and daughters of magical parents who have no magical powers of their own), to participate in private placements also. So my wife needed not feel bad for Goldman Sachs or Morgan Stanley. They weren’t being left out.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">By now my wife was very upset, she could do without buying Kingdom of Jordan 2015’s, but she did not like the to see her choices conditioned. In the world of investing, she was a second-class citizen, just for being a US citizen.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“I don’t understand. Why would the SEC do something that discriminates against US citizens?”<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">They do it to protect you. God forbid that Jordan or Dell Computer or someone else file their forms without all the right disclaimers, provisions and explanations that you are never going to read anyway. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">“I’m really sorry I can’t give you a better reason.”<span style="mso-spacerun: yes;"> </span>I said as she left.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Of course, REG S, is just another example of regulatory patchwork, enacted in the 1990s to deal with exceptions and which ultimately became a rule. Along with security laws dating from the 1930s, which regulate markets and procedures inherited from the 19<sup>th</sup> century and before, you could think that the whole system was due for revamping.<o:p></o:p></div><div class="MsoNormal">Maybe we could use something more atoned to a global marketplace where information flows almost instantaneously. Things have changed in the last century or so (you’d think).<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Don’t hold your breath. The current system serves the financial industry well. Very well. The recent events concerning Goldman Sachs’ private equity investment in Facebook illustrate the point. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">As you may recall, Goldman agreed to invest $500 million in Facebook, through an ad-hoc vehicle. Goldman’s clients would then be allowed to participate in that vehicle and hence invest indirectly in Facebook. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Sounds like something to “like”, right?<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">The SEC then decided they should look into this deal a bit closer and perhaps force open Facebook’s private “books”.<span style="mso-spacerun: yes;"> </span>Facebook wasn’t quite ready for that level of information sharing with the world, so Goldman said “REG S”, which translated means “SEC, bug off”. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Vampire Squids 1, Regulators 0. Regular investors: DNP. (Do Not Play).<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">(The photo is <i>Vampyroteuthis infernalis </i>or the vampire squid from hell. Unofficial mascot of Goldman Sachs).</div><div class="MsoNormal"><br /></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><br /></div><!--EndFragment--> </div>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-3011727801882113130.post-60416640423900065872011-01-15T13:31:00.002-05:002011-01-16T06:59:35.904-05:00State of the Junk<!--StartFragment--><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkHV9XRiumzmyV0VoPxHjQhExOmRq89A_zgYqG2m0z4FmlcHRKDSK8DaLxLeKPRiLbgVQiUk5MhEbFVb79_c38h5S-NpCQlRX9aBwOANGVBQS8Ew94b9M1_iytC9c2iwjtDehMQlKGxAM/s1600/Cmar2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkHV9XRiumzmyV0VoPxHjQhExOmRq89A_zgYqG2m0z4FmlcHRKDSK8DaLxLeKPRiLbgVQiUk5MhEbFVb79_c38h5S-NpCQlRX9aBwOANGVBQS8Ew94b9M1_iytC9c2iwjtDehMQlKGxAM/s400/Cmar2.jpg" width="275" /></a></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Happy New Year to all. Two-thousand ten was a very good for junk bond investors like myself. Not as fantastic as 2009, but we’ll take this kind of performance any day of the week and twice on Sunday.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">The FINRA-Bloomberg High Yield total return index was up 12.2%, for the year, on the heels of a<span style="mso-spacerun: yes;"> </span>46% gain in 2009. Not bad. </div><div class="MsoNormal">There are numerous indices out there and this one just happens to be available and free. <a href="http://cxa.marketwatch.com/finra/BondCenter/ActiveUSCorpBond.aspx">HERE</a></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><br /></div><div class="MsoNormal">The equivalent Investment Grade index did quite well also, yielding 6.5%, even if it did give up some gains towards the end of the year. <o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">For 2011 there are some things to look forward to and some issues to worry about.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Positive for junk: improving economies lowering default rates . Positive for bonds in general: rock-bottom short-term interest rates which continue to force investors to move up in risk to lock in yield.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">On the worry side: Big Ben at the FED. Ben’s latest folly, called QE2, as in quantitative easing two or too (take your pick) is a fresh round of dollar printing from your favorite bearded guy.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal">Jon Stewart analyzed this to perfection last month, but here it is for those who missed it.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal"></div><table cellpadding="0" cellspacing="0" height="353" style="background-color: whitesmoke; color: #333333; font: normal normal normal 11px/normal arial; width: 360px;"><tbody><tr style="background-color: #e5e5e5;" valign="middle"><td style="padding: 2px 1px 0px 5px;"><a href="http://www.thedailyshow.com/" style="color: #333333; font-weight: bold; text-decoration: none;" target="_blank">The Daily Show With Jon Stewart</a></td><td style="font-weight: bold; padding: 2px 5px 0px 5px; text-align: right;">Mon - Thurs 11p / 10c</td></tr><tr style="height: 14px;" valign="middle"><td colspan="2" style="padding: 2px 1px 0px 5px;"><a href="http://www.thedailyshow.com/watch/tue-december-7-2010/the-big-bank-theory" style="color: #333333; font-weight: bold; text-decoration: none;" target="_blank">The Big Bank Theory</a></td></tr><tr style="background-color: #353535; height: 14px;" valign="middle"><td colspan="2" style="overflow: hidden; padding: 2px 5px 0px 5px; text-align: right; width: 360px;"><a href="http://www.thedailyshow.com/" style="color: #96deff; font-weight: bold; text-decoration: none;" target="_blank">www.thedailyshow.com</a></td></tr><tr valign="middle"><td colspan="2" style="padding: 0px;"><embed allowfullscreen="true" allownetworking="all" allowscriptaccess="always" bgcolor="#000000" flashvars="autoPlay=false" height="301" src="http://media.mtvnservices.com/mgid:cms:item:comedycentral.com:367652" style="display: block;" type="application/x-shockwave-flash" width="360" wmode="window"></embed></td></tr><tr style="height: 18px;" valign="middle"><td colspan="2" style="padding: 0px;"><table cellpadding="0" cellspacing="0" height="100%" style="margin: 0px; text-align: center;"><tbody><tr valign="middle"><td style="padding: 3px; width: 33%;"><a href="http://www.thedailyshow.com/full-episodes/" style="color: #333333; font: 10px arial; text-decoration: none;" target="_blank">Daily Show Full Episodes</a></td><td style="padding: 3px; width: 33%;"><a href="http://www.indecisionforever.com/" style="color: #333333; font: 10px arial; text-decoration: none;" target="_blank">Political Humor & Satire Blog</a></td><td style="padding: 3px; width: 33%;"><a href="http://www.facebook.com/thedailyshow" style="color: #333333; font: 10px arial; text-decoration: none;" target="_blank">The Daily Show on Facebook</a></td></tr></tbody></table></td></tr></tbody></table><br /><div class="MsoNormal"><br /></div><div class="MsoNormal">I know there is a lot of debate over QE2, but I come from the third world, where we have been lectured for decades by first-worlders ad-nauseum that we can’t do this crap and get away with it unscathed. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">Now, el Central Banker Numero Uno del Mundo is telling us that he can. Color me skeptical. This is going to come back and bite us and bond investors need to be aware. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">When? Not Yet. How? Now sure. Stay tuned. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">For now, it looks like us junk collectors <span style="mso-spacerun: yes;"> </span>will be fine in 2011, although it will be hard to keep up with the equity markets (so don’t try!). After that, it could be plan B time. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">As for the photo: a cute little squid of the genus <i>Stoloteuthis</i> from the Indian Ocean. <o:p></o:p></div><!--EndFragment-->Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3011727801882113130.post-34164821202829828312010-10-27T14:11:00.001-04:002010-10-27T16:14:24.024-04:00Betting with Paulson<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirPvovziWtZwLl6p3GmBSEDJRHqskfxKe9ADUxesN1aXETAYmQmhZ323E7vTlY-5dSVV_WGDL4Jg1Wc74KwDX2JG27JiO8LbCOirf6wtutns_SiJHMN6DDnsdlx0pk4GFHwlg3gq9rOH4/s1600/orasddino.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirPvovziWtZwLl6p3GmBSEDJRHqskfxKe9ADUxesN1aXETAYmQmhZ323E7vTlY-5dSVV_WGDL4Jg1Wc74KwDX2JG27JiO8LbCOirf6wtutns_SiJHMN6DDnsdlx0pk4GFHwlg3gq9rOH4/s320/orasddino.jpg" width="320" /></a></div><span class="Apple-style-span" style=" ;font-family:'Lucida Grande';font-size:small;"><span class="Apple-style-span" style="font-size:11px;"><br /></span></span><br /><div class="MsoNormal"><br /></div><div class="MsoNormal">At times, investing in the gaming industry can be a gamble (/corny opening line). Not that it really has to be that way. Like any addiction, gaming produces quite stable cash flows once the business is up and running and a customer base and a location has been established. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">The threats are there, of course, with the expansion of licenses from revenue-hungry governments and the ominous Internet. Still, “if you build it, they will come” has worked relatively well in the past, so who are we to question its future applicability. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">That said, gaming is a place where high yield thrives, since, not unlike gamblers, casino operators love to “double down” with plenty of leverage. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">Where there’s leverage, there’s “credits” (as the pundits like to call bonds these days) and opportunities for bond investors (somehow credit investors doesn’t sound right) to throw some chips into the fray.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Start with MGM Resorts International, which owns a good chunk of the Las Vegas Strip (Bellagio, Mandalay Bay, Monte Carlo, Luxor, Grand, etc.) plus casinos and resorts around the rest of the world. Lots of property with a ton of debt, and booking substantial losses. Still, it’s a name I like, since the cash flow is good, and the company has shown financial agility. They have sold property to raise cash and recently announced they would issue new stock to the market. That’s always good for bond investors. In addition, Hedge fund manager John Paulson picked up a 9%+ equity stake earlier this year. Not fresh cash, but it’s always reassuring to have a guy like Paulson below you in the capital structure.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">For MGM bonds, there are a number of choices, ranging from senior secured (the least risky in case of default) or the subordinated, which may not fare well in such a case. I listed a few on the table below. Personally, I like the subordinated 2013’s, because you might as well go “all in” if you think bankruptcy is looking like a long shot. But in any case, all these bonds have rallied over the last year and the easy money is over.</div><div class="MsoNormal"><br /></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="MsoNormal">Second up is Harrah’s Entertainment, which is a behemoth like MGM, only larger and with less concentration in Las Vegas and more property in Atlantic City (not a good thing). Harrah’s was taken private in 2006 by private equity firms TPG and Apollo, which then proceeded to load it up with debt. That’s standard procedure in these cases. It’s also standard procedure for these takeover specialists to screw over those debt holders if necessary and convenient. That’s also not a good thing. Still, as we stated above, this is a business that generates cash, apparently even in Tunica, Mississippi (where Harrahs has THREE casinos).</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Still, it’s not enough to make a bondholder comfortable (not that we ever are). So, once again Paulson to the rescue. Paulson’s fund(s) recently picked up a nice chunk of Harrah’s debt (over $800 mm) and agreed to exchange it for equity. For bondholders that’s a good thing since it means some deleveraging, if not a whole lot. Harrah’s LT debt is close to $20 billion. The company is planning to go public with its shares shortly, and from the preliminary prospectus, it appears they will be selling an additional $575 million in shares to the public. That would be a good thing, since it would mean more deleveraging. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">Still, count me as a bit skeptical on Harrah’s, and I’d prefer the secured bonds, which still are offering a very hefty yield. That would make it good for a couple of chips.</div><div class="MsoNormal"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvlWyzhAqnvc7uPge4hpxa26A983uoa6kmwyIKa5GdS5DG8ai75tCm7uEO2G5flVXdJwP_Xoxk-TCpk6hFClK4PgRYI9GlVqA7Q1kHyUSmP9X2ua5UFZq9HfYP_62P57i2aNq-FsSskK8/s1600/Casinobonds.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="105" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvlWyzhAqnvc7uPge4hpxa26A983uoa6kmwyIKa5GdS5DG8ai75tCm7uEO2G5flVXdJwP_Xoxk-TCpk6hFClK4PgRYI9GlVqA7Q1kHyUSmP9X2ua5UFZq9HfYP_62P57i2aNq-FsSskK8/s320/Casinobonds.jpg" width="320" /></a></div><br /><br /><br /></div><div class="MsoNormal">Here's a BST oldie to get you in the gamblin' mood. </div><div class="MsoNormal"><br /><object height="385" width="480"><param name="movie" value="http://www.youtube.com/v/Jj231TLCbD4?fs=1&hl=en_US"><param name="allowFullScreen" value="true"><param name="allowscriptaccess" value="always"><embed src="http://www.youtube.com/v/Jj231TLCbD4?fs=1&hl=en_US" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="480" height="385"></embed></object></div><div class="MsoNormal"><br /></div>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-3011727801882113130.post-34344239646439487742010-06-28T19:21:00.002-04:002010-06-28T19:24:01.463-04:00Converting to Solar<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG5AfRHbSwF431mAm8M_n3dReqcnDoyx-GN3uvKCORv16QfRvrgQs52ut0oTygPXxblnWeuuukEptHACJJkomW9Na65QRWiRjcm3DeHDLNFW6bxzksE7QOci6IzqKiPwlemrwJjbwLeVY/s1600/Solar-Farm.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG5AfRHbSwF431mAm8M_n3dReqcnDoyx-GN3uvKCORv16QfRvrgQs52ut0oTygPXxblnWeuuukEptHACJJkomW9Na65QRWiRjcm3DeHDLNFW6bxzksE7QOci6IzqKiPwlemrwJjbwLeVY/s400/Solar-Farm.jpg" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><span class="Apple-style-span" style=" ;font-family:'Lucida Grande';font-size:small;"><span class="Apple-style-span" style="font-size:11px;"><br /></span></span><br /><div class="MsoNormal">Financial bubbles, not unlike supernovas, leave reminders of their explosions throughout the market Universe.</div><div class="MsoNormal">A bubble in alternative energy, and particularly Solar stocks grew quietly in 2006-2008 and burst pretty much in tandem with other bubbles such as the one in housing. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">What were boom times have turned into dark times for solar companies, as competition is fierce and subsidies have been subsiding. Many of these companies are Chinese, so the Yuan’s recent revaluation has become a new concern.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">But solar companies did take advantage of the demand for their stocks during the boom to raise capital and finance their activities, Solar panels may be shiny, but they don’t manufacture themselves.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">During the brief boom, a very popular financing option for solar companies was issuing convertible bonds. Their stocks were on a tear, so the companies (wisely) decided to give up a bit of their potential stock upside for some cheap (low coupon) financing.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">And so they did. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">Fast-forward two years later and these convertibles are “busted”. That is, the market price of the underlying stock is so far away from the equivalent conversion price, that the convertible component of the bonds is practically worthless.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Nonetheless, they are still bonds, still pay a coupon and (fingers crossed) will repay principal at maturity. Now trading at discounts to par, the yields are enticing and these bonds have the added attraction in that a good portion of the total yield will come in the form of capital gains, which for many taxpayers implies a lower rate and pushing the taxable event a bit out into the future.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Here’s a table of some of the solar convertibles out there. Like always click to make it bigger.</div><div class="MsoNormal"><br /></div><div class="MsoNormal" style="text-align: center;"> <o:p></o:p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJf_hW3BDCPdeUoD7UDk7aTff43b7jY_xKWA3e0KE6pu1AbKdASW9Bnz8Vq7NTppVYGYF5bdEDhWX3egIn1pt3i4ugCapHBQGeSeWVXm7loluriNswBGfYwCrBpB4t80uRDPlfX6rwSBc/s1600/Solarbonds.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="140" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJf_hW3BDCPdeUoD7UDk7aTff43b7jY_xKWA3e0KE6pu1AbKdASW9Bnz8Vq7NTppVYGYF5bdEDhWX3egIn1pt3i4ugCapHBQGeSeWVXm7loluriNswBGfYwCrBpB4t80uRDPlfX6rwSBc/s400/Solarbonds.jpg" width="400" /></a></div><div class="MsoNormal"><br /></div><div class="MsoNormal">With the exception of Trina Solar, whose convertible is in the money, the others are pretty much straight bonds now, so the main issue is whether or not they will be able to pay. In general, the prospects of that are not bad, since most of these companies are not excessively leveraged and could tap the markets for equity or new debt when time comes to roll over. </div><div class="MsoNormal">(As always do your own due diligence, and your mileage will vary).</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Even Evergreen Solar, which appears to be the most vulnerable on the list, has a positive tangible equity in its books. Of course, ESLR has yet to make a profit, so keep that in mind. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">My personal favorite is LDK Solar, which has been reporting profits and whose convertibles have a put provision that can shorten maturity by two years. Trading around 85% makes for a 26% yield in less than a year, if you exercise that put.<span style="mso-spacerun: yes;"> </span>Not very liquid, but if I managed to find some (and I did), they can’t be that scarce.</div><div class="MsoNormal"><br /></div><div class="MsoNormal">Energy Conversion Devices is another that looks “overlooked”. The company took a huge (non-cash) write-off recently, which affected the stock and general perception very unfavorably (some analysts consider their technology outdated). But there are believers and the company recently did some private debt/equity swaps with the convertibles (below the strike price, obviously). Although such an action is dilutive (and not great news) for stockholders, the more of those they do, they better chance bondholders have of collecting ultimately. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">Of the others, JA Solar would seem to be the least risky and Suntech Power, the best value. </div><div class="MsoNormal"><br /></div><div class="MsoNormal">So, there you have it, a “green” alternative to my previous oily suggestions. May the daystar shine radiantly on your portfolios, </div><div class="MsoNormal"><br /></div><!--EndFragment-->Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3011727801882113130.post-24819647166661681932010-06-13T19:12:00.007-04:002010-06-13T19:32:54.450-04:00Spill Bonds<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXYMNBT6MalzoKAHRp9UaFpdBVVpOzF9RMSdTneDfBoUYLOxhlzN1WQPAg0dD8l9UitVmO8cK4T1hFaTPgKbzwfCvpmsuQnfCHcCwwwOoC_sremTapYUDSSlhzoMKZ23xbmcVXK2GPxU0/s1600/bp001.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="261" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXYMNBT6MalzoKAHRp9UaFpdBVVpOzF9RMSdTneDfBoUYLOxhlzN1WQPAg0dD8l9UitVmO8cK4T1hFaTPgKbzwfCvpmsuQnfCHcCwwwOoC_sremTapYUDSSlhzoMKZ23xbmcVXK2GPxU0/s320/bp001.jpg" width="320" /></a></div><div class="separator" style="text-align: center;clear: both; "><br /></div>It seems the whole planet has been watching the Gulf of Mexico oil spill. The world cup may provide a much-needed distraction from that unfolding disaster but in any event, analysts and traders are fast at work trying to find ways to make money in the oily turmoil, without appearing to be too oblivious to the plight of shrimp fishermen and seabirds.<br /><br />Most of the work has centered on stocks, but like always, there is a bond angle to this also. Let’s “explore” and “drill down” to details.<br /><br />First: the good guys, those trying to clean up this mess. Clean Harbors (CLH) is a name that comes to mind. Its stock is up over 20% since the spill. Its 2016 bonds, on the other hand, have traded flat. If you’re happy with a 7% yield on a BB- rated bond of a company whose prospects were fine and just got a lot better, there’s an idea for you. Clean and simple. The issue is a bit small ($300 mm), but it does trade (Reg S 144A only for now).<br /><br />Now. the evil enviro-killers. BP jumps out first, of course, While much has been make of BPs stock slide, its bonds have sold off also. Here’s graph of the yield on BP’s 5.25% , 2013s as an example.<div><br /></div><div><div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIWcMh0ae9ghdULyNVPFtfk5oTX0asF1Hpf7hrSRNFZa15KcMz0lrU8kqhkYvJRMKBhqMlhxbZseTDPYGJWo00lBmL7v3or5Xhhh5WzEiUG4GadOtI5Ff9tGKdXPzoTQ_p4fHgj89ha6c/s1600/BPLNGraph.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em; "><img border="0" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIWcMh0ae9ghdULyNVPFtfk5oTX0asF1Hpf7hrSRNFZa15KcMz0lrU8kqhkYvJRMKBhqMlhxbZseTDPYGJWo00lBmL7v3or5Xhhh5WzEiUG4GadOtI5Ff9tGKdXPzoTQ_p4fHgj89ha6c/s320/BPLNGraph.jpg" width="320" /></a></div><br />BP is still rated AA- by S&P, although we’d expect a downgrade at some point. In any case, the possibility that this spill will send BP into bankruptcy has to be extremely remote. The highest clean up cost estimate out there is $15 billion, which is huge amount of money. But BP can afford that, the company made $20 billion in profits last year.<br /><br />At the bottom of this post there’s a list of oil spill bonds including some BP USD issues. BP also has issued bonds in Euros, Yens and Sterling, so the whole world can get clean up on what appears to be a temporary bargain.<br /><br />BP may be the main target of the “spilling fields” disaster, but not the only one. Transocean (RIG) owns the Deepwater Horizon rig, which is leased to BP. Transocean will probably have a bill to pay in this fiasco too, but they too can afford it.<br /><br />RIG bonds have been submerging also. Here is the yield on the 5.25%% 2013s. Quite a spike.</div><div><br /></div><div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcZ91TaoynCA9HDcTqdJS6OVl1lSFYLA8RPKOKV9Jud37EOekOiAA3qkifG0wlyR-GJJYSQSXOP5n1VDj_AGMMG5hLfx_EYNz1LCEuUP9d3bB4MJ5uRyLYLl4cTBJizu0SaLLOfgvDYUQ/s1600/RIGGraph.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em; "><img border="0" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcZ91TaoynCA9HDcTqdJS6OVl1lSFYLA8RPKOKV9Jud37EOekOiAA3qkifG0wlyR-GJJYSQSXOP5n1VDj_AGMMG5hLfx_EYNz1LCEuUP9d3bB4MJ5uRyLYLl4cTBJizu0SaLLOfgvDYUQ/s320/RIGGraph.jpg" width="320" /></a></div><div><br /><br />And there has been substantial “collateral damage also”. A company like Hornbeck Offshore (HOS), which doesn’t drill itself but operates supply vessels to the rigs has seen its stock and bonds hit. Several clients are reneging on their contracts alleging “force majeure” in the offshore drilling moratorium, but HOS isn’t buying that and is countersuing. The bonds have sold off and there is a nice buying opportunity, since the company’s balance sheet is still quite acceptable.<br /><br />Then there are cases like McMoran Exploration (MMR) and Energy XXI (EXXI). These companies have operations on and offshore in the Gulf area, but the offshore ops are “shallow water”. Shallow water is a whole different animal when it comes to oil spill risk and the ban has been lifted for shallow water already.<div><br /></div><div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5_5euaO4IhQAm9iZCIFLau0DxOOm07y0L_65lbKrPrJvdgZS-x-VUyK6gnB1nRqq-j0bJbBoCJAHFJguVer7qiUQef_peZvd-l3_iUTPLlkG36KsCUIKgVUOIzdjd9FXeKPCidpxyhqs/s1600/OilBondstable.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em; "><img border="0" height="128" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5_5euaO4IhQAm9iZCIFLau0DxOOm07y0L_65lbKrPrJvdgZS-x-VUyK6gnB1nRqq-j0bJbBoCJAHFJguVer7qiUQef_peZvd-l3_iUTPLlkG36KsCUIKgVUOIzdjd9FXeKPCidpxyhqs/s320/OilBondstable.jpg" width="320" /></a></div></div>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3011727801882113130.post-15549608875041055082010-05-09T11:58:00.010-04:002010-05-10T08:32:01.175-04:00Yet Another Update on My Wife's Junk<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMQm26hNEamyeKY5RyGr8ueNd8ErNIIfVReitJkEvoaPuXu6gNgP8r3qaWkdmYiYqW-b2zECuphI_6XBRyucVWKpASSHuv1ddZCuZsSSBv11ntDHoXTx5-pQa6RN1J6P6aZNB_eYCo7wQ/s1600/n535033284_6930.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 200px; height: 150px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMQm26hNEamyeKY5RyGr8ueNd8ErNIIfVReitJkEvoaPuXu6gNgP8r3qaWkdmYiYqW-b2zECuphI_6XBRyucVWKpASSHuv1ddZCuZsSSBv11ntDHoXTx5-pQa6RN1J6P6aZNB_eYCo7wQ/s320/n535033284_6930.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5469305439293795010" /></a><br /><br />Last year I blogged about the junk bond portfolio that my wife put together all by herself (mostly). <a href="http://dalmady.blogspot.com/2009/04/my-wifes-junk.html">LINK</a>. I also ran an update on it later in the year. <a href="http://dalmady.blogspot.com/2009/09/update-on-my-wifes-junk.html">LINK</a>.<br /><br />This is what that portfolio looked like last time I updated: (click to enlarge)<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjehOpEfMKBo1mTLqmJ6YVCnzHfRmrIq56PhLuM0-Ubo8kf8LoABZgK4wAN2bwgGGzpainxvafZkmIxiMaXz3CopVVVsHUiJR2n7hRTqXHl6fbd_U5acziRCZfra6zYRpg_GqeMZP4jcpo/s1600/WifeBonds2.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 152px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjehOpEfMKBo1mTLqmJ6YVCnzHfRmrIq56PhLuM0-Ubo8kf8LoABZgK4wAN2bwgGGzpainxvafZkmIxiMaXz3CopVVVsHUiJR2n7hRTqXHl6fbd_U5acziRCZfra6zYRpg_GqeMZP4jcpo/s320/WifeBonds2.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5469303856140183234" /></a><br /><br />A few things have happened since. First and foremost, everything went up. A lot. The portfolio gained 45% in 2009 and is up around 5% so far this year. Not that my wife was keeping count. She’s content to just clip coupons. I’m the one doing the counting. <br /><br />Second there were corporate actions. Starwood Hotels (Sheraton) made a tender offer (accepted) and Jo-Ann Stores called its bonds. <br /><br />In addition, the Alcoa and Seagate Bonds rose enough in price to trigger the “mortgage” sell signal. That signal basically states that if the bond pays less than our (tax-adjusted) mortgage rate, sell it and either buy something else or pay down the mortgage.<br /><br />In any case, she decided not to pay down the mortgage, but rather to buy some more junk. <br />What to buy?<br /><br />For starters, she selected SmithField Foods, a company I blogged about around Thanksgiving. That’s good because it means she actually reads my blog. When I mentioned that she already had two food companies in Dole and Chiquita, she said “What do Pineapples and Bananas have to do with Turkeys?” OK. Point Taken. Of course, coming from a vegetarian, who knows?<br /><br />She did take my advice on her next purchase. I thought she could have an energy company in the portfolio, so I showed her several options. There are quite a few smaller oil and gas producers and refiners with bonds in the market at attractive yields. She chose Clayton Williams Energy, an oil and gas company with operations in New Mexico, Texas and Lousiana. Hopefully, for my sake, that well doesn’t come up dry. <br /><br />Finally, she got motorized with her last two picks. First, Ford Motors, which has been doing much better lately and is benefiting from the troubles that Toyota is having. Ford bonds were huge winners last year, but still could have room to run. <br />Second, Avis-Budget Rent a Car, which is a highly leveraged situation, but my wife figures if they try harder they’ll pull through. <br /><br />Here’s what the portfolio looks like now:<br />Click on the table to enlarge:<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKQNJRkK9INyzzHVnk3OoxX0lY-pOImP3ulbIMrAlmkO_5dlz1yxdQOUWdCJ69_v6RtOR0JmPmAJGkSJCfGpnLJN-5_ciq76yJZBk9pkQ9Bl_9WhVVAiwjhsiRjtnoXPMIM87huE9Jo-w/s1600/Wifemay2010.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 152px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKQNJRkK9INyzzHVnk3OoxX0lY-pOImP3ulbIMrAlmkO_5dlz1yxdQOUWdCJ69_v6RtOR0JmPmAJGkSJCfGpnLJN-5_ciq76yJZBk9pkQ9Bl_9WhVVAiwjhsiRjtnoXPMIM87huE9Jo-w/s320/Wifemay2010.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5469304226708053714" /></a><br /><br /><br />It’s a bit junkier, longer in duration and the overall yield is lower. <br /><br />Only averaging about 7.56% now. But confronted with the alternatives: bank CDs at under 1% or taking her chances on the stock market, she says she’ll stick with her junk for now. She’s happy just to collect the interest. Market crashes? She's like "What me worry?"<br /><br />That being the case, she should be able to sit tight and just clip coupons for another year and a half until her next bond matures. We’ll see what the world looks like then. Maybe it will be time to pay down the mortgage. <br /><br />As for the photo. Yes, that is my wife. I married up, I know.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-3011727801882113130.post-78410911635025813122010-04-22T08:14:00.003-04:002010-04-22T08:29:03.968-04:00Getting up to speed<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8bh1iHGwF4_n6kpINXGNeG5M7ClXuge14Fd1LSliCgW9eBPuxYIMPkPQpn53zdRGQqj6b04Dqy20GKWdeDcgmu7wJHKDmiVR0xDOg5myFs1trukNnD5mf0hHBnlWfn7ytsNCyrfXVIMM/s1600/TheMullet.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 256px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8bh1iHGwF4_n6kpINXGNeG5M7ClXuge14Fd1LSliCgW9eBPuxYIMPkPQpn53zdRGQqj6b04Dqy20GKWdeDcgmu7wJHKDmiVR0xDOg5myFs1trukNnD5mf0hHBnlWfn7ytsNCyrfXVIMM/s320/TheMullet.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5462937158395016786" /></a><br />I haven’t blogged for a while, so I thought we’d catch up on some things written about over the past year or so.<br /><br />First, bonds in general. <a href="http://dalmady.blogspot.com/2009/03/bonds-for-everyone.html"target=_blank>LINK</a>. There is no doubt that corporate debt has been the asset star of the last year or so. While stocks have made their way back and are closing on their high-water marks, most bond portfolios and funds are hitting new highs.<br /><br />The category is still very much in favor and there is some value still to be found. Don’t get too greedy and you’ll be ok. There are a lot of new issues coming to market both in the developed and emerging markets, so there is quite a bit to choose from. The big gains are over now, its coupon-clipping time. <br /><br />As for more specific issues, our friend Borat must be happy. <a href="http://dalmady.blogspot.com/2009/04/economic-learnings-of-kazakhstan-for.html"target=_blank>LINK</a>. Kazakstan’s sovereign risk is now lower than many Eurozone countries. Not only Greece (duh), but Hungary , Portugal and almost Spain. The fact that Kazakh debt trades better than California’s was widely remarked in the press. <a href="http://www.huffingtonpost.com/2010/03/01/californias-debt-now-risk_n_481058.html"target=_blank> LINK.</a><br /><br />In Ukraine, things have calmed down. Elections were held in January/February and the pro-Russian candidate Victor Yankovych won a close second-round victory over Yulia Tymoshenko, despite her good looks. <a href="<br />http://en.wikipedia.org/wiki/Ukrainian_presidential_election,_2010<br />"target=_blank>LINK</a>. And so the “Orange Revolution” was reversed. Tension between Russia and Ukraine which contributed to the “gas war” between Gazprom and Naftogaz has come down dramatically and there are even talks of joint ventures. <a href="http://dalmady.blogspot.com/2009/09/long-and-short-of-naftogaz.html"target=_blank>LINK</a>. Russia has agreed to give Ukraine a price break on the gas it consumes, while Ukraine will extend Russia’s lease on its Black Sea Naval ports. <a href="http://online.wsj.com/article/SB10001424052748704133804575197923257073744.html"target=_blank>LINK.</a><br />Naftogaz bonds, which defaulted briefly in October (swapped for new issue- <a href="http://dalmady.blogspot.com/2009/10/naftogaz-defaults-bondholders-rejoice.html"target=_blank>LINK</a>) are now trading at 108%. I remember an analyst stating that he “wouldn’t be surprised if the new Naftogaz bonds were trading above par in less than a year”. Oh wait, that was ME. <br /> Isn’t it nice when neighbors get along?<br /><br />As for corporate issuers: AIG and its subsidiaries are still current with their bonds all of which have rallied sharply. <a href="http://dalmady.blogspot.com/2009/09/bailout-bonds-or-aig-trifecta-part-i.html"target=_blank>LINK</a>. <a href="http://dalmady.blogspot.com/2009/10/aig-trifecta-part-ii-ilfc.html"target=_blank>LINK</a>. <a href="http://dalmady.blogspot.com/2009/10/aig-trifecta-part-iii-american-general.html"target=_blank>LINK</a>. An important “turning point” was reached when airplane-leasing subsidiary ILFC returned to the bond market, thereby reducing the refinancing risk of its outstanding bonds. <a href="http://www.marketwatch.com/story/ilfc-announces-proposed-offering-of-additional-8625-senior-notes-due-september-2015-and-additional-8750-senior-notes-due-march-2017-2010-03-30"target=_blank>LINK</a>. <br /><br />Herrtz quietly dropped the suit against an analyst who had named the company as a possible bankruptcy candidate. They figured out it would only get them bad publicity. Took them a couple of months to figure that out. <a href="http://www.allbusiness.com/company-activities-management/financial-performance/13502327-1.html"target=_blank>LINK</a>.<br /><br />Despite my skepticism, Kodak’s bonds and stock have rallied, as the company raises cash selling or licensing some patents and is trying to raise more by suing the likes of Apple and Research in Motion. I could have held on…oh well. <a href="http://dalmady.blogspot.com/2009/09/kodak-moment-in-junkland.html"target=_blank>LINK</a>. <a href="http://online.wsj.com/article/SB10001424052748703757504575194331184972428.html?ru=yahoo&mod=yahoo_hs"target=_blank>LINK</a>.<br /><br />The price of Gold has stagnated, ruining a speculative gold trade I had set up, Sometimes investors DON”T go bananas. Especially when you expect them to. <a href="http://dalmady.blogspot.com/2009/12/all-that-glitters.html"target=_blank>LINK</a>. <br /><br />Venezuelan bonds have rallied of late, but still yield much more than their credit rating would suggest. What good are the numbers if you can’t believe them?<a href="http://dalmady.blogspot.com/2010/01/not-prophet-in-venezuela.html"target=_blank> LINK</a>.<br />Analysts are looking at a $1.5 billion bond maturity in August, as Central Bank reserves drop. <br /><br />Blockbuster and Netflix continue their lopsided battle. The Hollywood studios have realized that Blockbuster’s survival is in their best interest. How much they will help keep Blockbuster away from bankruptcy remains to be seen. Anyway, the four trades proposed back in February are winners at this point. <a href="http://dalmady.blogspot.com/2010/02/internet-killed-video-store.html"target=_blank>LINK</a>. <a href="http://www.ft.com/cms/s/0/6ae1a70c-42a5-11df-91d6-00144feabdc0.html"target=_blank>LINK</a>.<br /><br />Now that we’re up to date on these trailing issues, maybe we can move forward and I can get around to blogging more consistently.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-3011727801882113130.post-80861979493657476302010-03-22T18:38:00.008-04:002010-03-22T19:09:14.002-04:00Life After Japanese<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnoqYArsz1hWyPikwsl-FXR1d7uiSdEW-nPy1aDEOY905m694MLLQm_vL8gESXC53fW3OTSPR3Gi4pWIe4LKq6N4-Argp53k7FFqOSMERcEEtOmh5Gdca9uH7CaMOY6Qm07hZAEUhYP_I/s1600-h/aikido-kanji-v1.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 116px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnoqYArsz1hWyPikwsl-FXR1d7uiSdEW-nPy1aDEOY905m694MLLQm_vL8gESXC53fW3OTSPR3Gi4pWIe4LKq6N4-Argp53k7FFqOSMERcEEtOmh5Gdca9uH7CaMOY6Qm07hZAEUhYP_I/s320/aikido-kanji-v1.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5451594592898030658" /></a><br />Not breaking news, but I wanted to mention that Japan’s population is shrinking. This is hardly unique in the world, since a number of other countries are also suffering from population decline, mainly in Eastern Europe. What makes Japan different and has demographers all over the world (all 25 of them) drooling in anticipation, is that they were expecting this, and there is really isn’t much Japan can do to avoid a dramatic depopulation in this century on a scale not seen since the bubonic plague ravaged Europe in the 1300s. <br /><br />Here are the projections. It’s a really great graph, so click on it, put it in a big window and take some time to look it over.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9vj1bbpKSnAxx7S9aobIw61UbhRDYVSAPM2yaJkJuv3mm_DMpibTvtYn_RZ_hDgTZVGTOhKWwtU6VP6JACS4MRrnOrvBznbDLC4Rfmt2BtueNP2EbtiuCukEU22kE0tjL06u158xE46I/s1600-h/JapPop.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9vj1bbpKSnAxx7S9aobIw61UbhRDYVSAPM2yaJkJuv3mm_DMpibTvtYn_RZ_hDgTZVGTOhKWwtU6VP6JACS4MRrnOrvBznbDLC4Rfmt2BtueNP2EbtiuCukEU22kE0tjL06u158xE46I/s320/JapPop.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5451592395433992754"/></a><br /><br />The estimate is that by the year 2105, the population in Japan will have plunged from its current 127 million to around 45 million. A 65% drop for those keeping score. The action has only gotten started. Last year, the population decline was a modest 75,000, but by the end of this decade the yearly decline should be in the 500,000-1,000,000 range. <br /><br />Driving the pop- drop is a fertility rate that has been in a steady decline for about 35 years, when it slipped beneath the “replacement rate” of 2.1 births per woman. It currently stands at 1.34, but even if it were to rise again, population decline would still occur since there are fewer and fewer women of childbearing age.<br /><br /><iframe width="400" height="325" frameborder="0" scrolling="no" marginwidth="0" marginheight="0" src="http://www.google.com/publicdata/embed?ds=wb-wdi&ctype=l&met_y=sp_dyn_tfrt_in&scale_y=lin&ind_y=false&rdim=country&idim=country:JPN&tstart=-315619200000&tunit=Y&tlen=47&hl=en_US&dl=en"></iframe><br /><br />The social reasons behind the fall in fertility are basically that Japanese women don’t want to get married and much less have children. And who can blame them as one Internet poster put it:<br /><br /> “Fewer Japanese women having babies because they don't want to get married to childish Japanese men. Also, babies are expensive, and why bring a child into a world with a looming threat of Godzilla?”<br /><br />Working women come home after 12- hour workdays to wait on their husbands and kids. Grandparents could babysit, if they weren’t busy taking care of their own parents. <br /><br />For years, the central and local governments have been extending financial incentives for women to procreate. But you have to question the commitment when it wasn’t until late 2008 that childbirth was even covered by medical insurance (it’s not an illness).<br /><br />Naturally, not everybody sees depopulation as a bad thing. Japan is still one of the more densely populated countries in the world and when they sought to “reach out” into the world for a little elbow room, the results weren’t pretty. <br />Still, the process is going to leave the country with a disproportionate number of elderly, and many are worried about that.<br /><br />Immigration has been the answer for other societies in this pickle. But the Japanese seem to love their monoethnicity and a massive immigration program is unlikely to garner popular support.<br /><br />Cruel and insensitive internet posters have suggested remedies such as subjecting Japanese males to “tenderization”, by forcing them to watch Sandra Bullock romantic comedy marathons Or spiking the water supply with ExtenZe. Very funny, guys. <br /><br />Why am I blogging about this? It’s interesting and something to be considered when investing. When Japan’s population is headed for a fall off a cliff, one can hardly expect the Nikkei to bounce back to its 1989 highs (almost 40,000 then, it’s standing at 10,800 now). I know I’ll think twice about buying Toyota stock. (/Investment Theme Justification)<br /><br />Rural Japan is already feeling the effects of depopulation. If you’re into this kind of thing, here’s a fine blog called “Spike Japan”, depicting the desolation setting in on the countryside. <a href="http://spikejapan.wordpress.com/"target=_blank>Great depressing stuff. </a><br />It’s almost like a preview from the series “Life after Humans.” <br />Enjoy.Unknownnoreply@blogger.com9tag:blogger.com,1999:blog-3011727801882113130.post-56384105402864712572010-03-13T23:32:00.004-05:002010-03-13T23:43:09.801-05:00Too Puny to Succeed<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMLr9T55n1q-qibCHnrFyFeeHWVRPXgUJttDol1y-B99PU6ivxP0VQIyy6oDyeR5W1t4p3jXNi-MJwdSXx_kUR30Sci4p6xWIWSs3BwjYXPbHoCb4mm-JrOP313Ac4PHTIx7UJrIoXj9E/s1600-h/TINY+DOG+1.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 182px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMLr9T55n1q-qibCHnrFyFeeHWVRPXgUJttDol1y-B99PU6ivxP0VQIyy6oDyeR5W1t4p3jXNi-MJwdSXx_kUR30Sci4p6xWIWSs3BwjYXPbHoCb4mm-JrOP313Ac4PHTIx7UJrIoXj9E/s320/TINY+DOG+1.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5448345446657192258" /></a><br />Now that banking reform is beginning to be discussed in Washington, much of the conceptual discussion about new legislation surrounds “systemic risk” and “too large to fail” institutions.<br /><br />Left behind is another structural challenge that faces regulators: “too puny to ever succeed”. <br /><br />The FDIC puts out quarterly banking statistics, which are quite a good source for stat buffs like myself.<a href="http://www2.fdic.gov/qbp/2009dec/qbp.pdf"target=_blank> LINK</a>. <br /><br />Here’s a tidbit: as of December, there were 8,012 banks in the US, with over $13 trillion in assets.<br /><br />I know large numbers are difficult, so I’ll say it again: EIGHT THOUSAND BANKS. <br />That’s a lot of banks. I mean, how many banks do you really need? Obviously something very wrong happened on the way to industry consolidation. <br /><br />The UK consolidated its banking industry in the early 20th century. Other countries, like Germany (with over 2,000 banks) have yet to see the shakeout. The US is on its way, with the total slowly coming down from over 14,000 in the 80s. But there is still a long way to go.<br /><br />Here’s a pie chart with the banks by size.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfN86OmeygB83UGe5eX421BO9kqbjQPC4oHb2iI4yee1vcCzRbAcGkt-lkhJlKb8Nsz8f0ZmkNmzlIee6UF-SsylVGrLSGsujTdpMMoKfaSyQYrwneo9TOqahykvVVA9XBXGCRroRBWuU/s1600-h/BankSize.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 281px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfN86OmeygB83UGe5eX421BO9kqbjQPC4oHb2iI4yee1vcCzRbAcGkt-lkhJlKb8Nsz8f0ZmkNmzlIee6UF-SsylVGrLSGsujTdpMMoKfaSyQYrwneo9TOqahykvVVA9XBXGCRroRBWuU/s320/BankSize.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5448343532502153074" /></a><br /><br /><br />What stands out here is that there are 2,845 banks with under $100 million in assets and almost 4,500 with under $1 billion. I know a billion sounds like a lot, but in terms of the total market, it represents less than 0.01%. <br /><br />So we’re talking about a market where 92% of the market players are puny. Individually, they are tiny, minute, and perhaps insignificant. As a group, however, they control 11.5% of the system’s assets, including 17% of the real estate loans. (Can you say “systemic risk”?). <br /><br />So what? You may say. More competition is great and it leads to greater efficiency. The fact is that in an efficient marketplace, these banks have no chance of long-term survival in their current form. Just think of the characteristics of the industry:<br /><br />Retail banking has commoditized/standardized products and services. A checking account is still a checking account (even if people don’t write as many checks anymore). <br /><br />Economies of scale exist. Processing two hundred transactions or whatever costs less per transaction than processing one hundred. <br /><br />Technology has not only drastically reduced transaction costs (enhancing economies of scale), but is destroying the geographical barriers that protected the small fries. Let’s face it, do you really need to go the bank (branch) anymore? If a bank’s competitive advantage is being “close” to the consumer, how much closer than a click on your computer screen?<br /><br />Close to 100,000 bank branches operate throughout the US, but although their number continues to grow (slower now), branches are shrinking in size and staffing. Last year, the WSJ reported that Bank of America was going to close 10% of its branches. The report was later <a href="http://money.cnn.com/2009/07/28/news/companies/BAC_branch_closures/index.htm"target=_blank>denied by the bank</a>, but you have to believe that the issue has been discussed in the bank. <br /><br />BTW, just to get an idea, there are about 30,000 supermarkets in the US. Three bank branches for every one supermarket, seems a bit much, IMO. <a href="http://www.businessweek.com/bwdaily/dnflash/content/aug2009/db2009082_056111.htm"target=_blank>LINK</a><br /><br />In any case, industry consolidation is now accelerated by the credit crisis. The FDIC can’t shut down these micro-banks fast enough. Of the 30 banks closed by the FDIC this year, <a href="http://www.fdic.gov/bank/individual/failed/banklist.html"target=_blank>25 have total assets of less than $1 billion</a>. Their challenge has been finding “less puny” and financially stable banks to absorb the operations of these failing banks. <br /><br />So long Waterfield Bank, Marshall Bank, Evergreen Bank and Charter Bank (etc etc).<br />We hardly knew ye. You were too puny to succeed.Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-3011727801882113130.post-45681918637924086642010-02-21T13:08:00.005-05:002010-02-21T13:16:32.643-05:00Whither Junk?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGlqMV52VpLY4fUrKvO20m4G7fQ1TfhGH1iRjOVj2DJvATlr9GXuKiyW8RUh4WDRljm8u0RP0pi-a9S7juKEApig6SrtuS3iygiOGabo5Wah9RTalz0ZmFsGkTjV2SmulIKx1UgJLUjnU/s1600-h/FINRAHY.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 153px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGlqMV52VpLY4fUrKvO20m4G7fQ1TfhGH1iRjOVj2DJvATlr9GXuKiyW8RUh4WDRljm8u0RP0pi-a9S7juKEApig6SrtuS3iygiOGabo5Wah9RTalz0ZmFsGkTjV2SmulIKx1UgJLUjnU/s320/FINRAHY.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5440762028517832418" /></a><br /><br />The beginning of 2010 hasn’t been quite as smooth as most of 2009 was for the junk bond market. Some fear here and there, a pulled deal or two and risk spreads have widened a bit.<br /><br />However, there is nothing really dramatic in this pullback. So far this year the FINRA-Bloomberg High Yield index is still up about 0.2%, but it’s 1.6% off the high achieved on Jan 11th. Compare that to some stock indices, a few of which (Spain) are down double-digits for the year and you’ll see junk has suffered only a “mild setback” in comparison.<br /><br />Naturally, after a year that saw this index rise 44%, expectations might be a bit exaggerated not only from those riding the wave, but also from those anticipating a fall from those perceived “heights”<br /><br />Still it’s always good to reassess one’s position. And mild or not, a setback is a loss and nobody wants to lose. So what now? <br /><br />After thinking it over for about two minutes , I’ll be sticking with my junk for now thank you and here’s why:<br /><br />1. The alternative is nothing. Not saying that there is no alternative, but if you’re<br />looking for something “safe” a 12-month FDIC insured CD at Bank of America is paying 0.80% APR. Two years: 1.11%. It’s quite ridiculous. Sure, bonds (and junk) aren’t really ‘safe”, but do you really want to give your money away to the big bad banks?<br /><br />2. Money continues to flow into bonds. The Investment Company Institute tracks money flows into money market and mutual funds. During 2009, the net flow into bond funds was $374 billion dollars vs. a NEGATIVE flow of $9 billion for equity funds (which is pretty much a wash). Where is the money coming from? Money market funds (down $566 billion in 2009) and bank CDs (see point 1). Some money market funds are paying 0.01% because they can’t pay “negative” interest. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCv_QYpoWB0OsIEhjP8PivsiRkFMhX-5a-OmlF0bXcNtBIrlldRu8gFs6g2zOwPzS-a71_65mSuXhkoB3QxZcRX1GAXRRU7xqS62eM0E04G7w2U-XDImLDIZven3CWkOrmZPwdHAeU1ws/s1600-h/CumMutFlows.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 225px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCv_QYpoWB0OsIEhjP8PivsiRkFMhX-5a-OmlF0bXcNtBIrlldRu8gFs6g2zOwPzS-a71_65mSuXhkoB3QxZcRX1GAXRRU7xqS62eM0E04G7w2U-XDImLDIZven3CWkOrmZPwdHAeU1ws/s320/CumMutFlows.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5440761960630104530" target=_blank/></a><br /><br />3. The boomers are getting older. The oldest boomers will be 64 this year and the youngest 46. E*Trade took a survey in 2008 (before the crash) and a majority of investors believe they are underweight in bonds and should be looking at allocating more. <a href="https://investor.etrade.com/releasedetail.cfm?ReleaseID=311283"target=_blank>LINK</a>.<br /><br />4. Deleveraging continues. Despite the fact that credit is becoming easier, companies are looking to reduce debt, either by issuing equity or other means. LBO activity, which normally has the opposite effect (new issuing of debt to retire equity) has been very light.<br /><br />Money flows and lack of attractive alternatives. This clip probably sums it up.<br /><br /><object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/T575Pbo4eWM&hl=en_US&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/T575Pbo4eWM&hl=en_US&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-3011727801882113130.post-52917348342949464922010-02-08T18:17:00.013-05:002010-02-08T18:46:18.477-05:00Internet Killed the Video Store<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfozXqpmmoMZd79amogdu-qtPPEWOgcze4sH16i4Lhn5kBcXWelcQ4cJPZVOC_xmjrRaAPr1cMubK6_t0m6USKuxSgCef9ByAUQGAMZLEEfXJQ8gD20Z9wD9rmWNp2c8JRPlSSjw1JVD8/s1600-h/BlockWeston.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfozXqpmmoMZd79amogdu-qtPPEWOgcze4sH16i4Lhn5kBcXWelcQ4cJPZVOC_xmjrRaAPr1cMubK6_t0m6USKuxSgCef9ByAUQGAMZLEEfXJQ8gD20Z9wD9rmWNp2c8JRPlSSjw1JVD8/s320/BlockWeston.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5436018479416852098" /></a><br /><br />The Internet has been a major disruptive force in business ever since Al Gore invented it a couple of decades ago (Al just can’t seem to remember exactly when it was).<br /><br />Of course, of the assumptions we all made about it back then, many didn’t pan out, but others did, not necessarily in the immediate, cataclysmic fashion expected, but gradually and in some cases definitively. <br /><br />In any case, battles between the “new” (Internet-based) and “old” (Bricks and mortar) abound and are ongoing, some having lasted for well over a decade now. <br /><br />Today on the History Channel: The war between Intenet-based mail-order movies for home viewing and the video store. Netflix vs. Blockbuster. <br /><br />This one, in particular has been raging for over a decade. <br /><br />Essentially the war is over. Netflix won. In their latest quarter, the company reported excellent results and has accumulated over 12 millions subscribers. Netflix put together two things that worked relatively well: the Internet and the postal service, and with low overhead, provided a model that was hard to beat. More info <a href="http://files.shareholder.com/downloads/NFLX/833610483x0x346847/7c386964-645e-425b-9e74-9357642fec52/NFLX_4Q09_Earnings_Release_012710.pdf"target=_blank>HERE.</a><br />Check out the stock performance:<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGM-cNr6V_QHc7trR0NqzpVPzvy8E1Ghms7L0XJ-dmJp0ZF0rknfjni44EGVpSGIOQqeUPtGfMl34vZGnpW0HwzLSa6sjaNxKuiIHhgbb-47IMyqebiAmEx-4PlZoO0KvIIJcnxgJVkX0/s1600-h/NFLX.jpg"target=_blank><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 174px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGM-cNr6V_QHc7trR0NqzpVPzvy8E1Ghms7L0XJ-dmJp0ZF0rknfjni44EGVpSGIOQqeUPtGfMl34vZGnpW0HwzLSa6sjaNxKuiIHhgbb-47IMyqebiAmEx-4PlZoO0KvIIJcnxgJVkX0/s320/NFLX.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5436018356961216050" /></a><br /><br />On the other hand, Blockbuster has had to deal with a model, which is outdated, but still has its followers. They operate over 7,000 stores in 25 countries. It used to be over 9.000 but reality has forced a round of closings and more are expected. They tried to beat Netflix at its own game with a mail-based system, but faltered and apparently are now losing subscribers. The estimates out there have them at between 1 and 2 million, far behind Netflix. And they have had to contend with a second battle front, from automated “kiosks” which rent out recent release DVDs for $1 per night. (Operated by Coinstar CSTR). To fight that, Blockbuster has set up some kiosks of its own (Blockbuster Express), but it’s a $1/day rental vs. a $4.99 2-day rental (what Blockbuster offers on new releases at the store), so that’s not going to be good for margins in the short run. <br />Here’s an interview with the CEO. Prepared to be unimpressed. <a href="http://www.thestreet.com/story/10674351/1/blockbuster-ceo-we-must-adapt-or-die.html?kval=dontmiss"target=_blank>LINK</a>. <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQww2V_LxI4e87XtlRQAv58NfHyJJnGaoPWGLXyPE98W0jq0i4WVvO_YcQdYyKDQjmHLAxGa51fCITweRW6cNMBrv0VBzAif2BfXP65yWVdmX-jzdzgEDYz-0ogoZ0fqyJIUo0lSvZoYg/s1600-h/BBI.jpg"target=_blank><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 174px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQww2V_LxI4e87XtlRQAv58NfHyJJnGaoPWGLXyPE98W0jq0i4WVvO_YcQdYyKDQjmHLAxGa51fCITweRW6cNMBrv0VBzAif2BfXP65yWVdmX-jzdzgEDYz-0ogoZ0fqyJIUo0lSvZoYg/s320/BBI.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5436018418362569554" /></a><br /><br />Don’t be sad, everyone dies sometime. With Blockbuster, it’s not a matter of “if”, but “when”. A competitor, Movie Gallery, operator of over 2.000 stores under the “Hollywood Video” brand, filed for bankruptcy last week, for the SECOND time in two years. <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahTnYVIVqS7E"target=_blank>LINK.</a><br /><br />This was supposed to be good news for Blockbuster. I’d call it mixed at best, but most likely ominous. <br /><br />With all that said, here come the investment ideas, starting with the winner: Netflix.<br /><br />Idea # 1: Netflix bonds. In November, Netflix issued $200 million of 8.5% unsecured bonds due in 2017 (8 years). When you can find them, they trade somewhere around 102-104%, to yield around 8% to maturity. They are callable at par in 2015. This trade looks easy. Nice yield. S&P rates the issue at BB-, which is “junk” but only “a little junky”.<br />One concern perhaps is that the trend towards direct downloads could grow, overtake and overwhelm Netflix. Probably. But when? These things take time. Habits do not change overnight. The horse and buggy did not disappear once the car was invented. AOL STILL has dial-up Internet subscribers, people still buy magazines and so on. The bonds look safe to me for the next 5-7 years (which is all it will take). Netflix as a business, probably hasn’t peaked yet, so let’s not worry about its demise. YET.<br /><br />Idea #2 Netflix puts. Instead of the straight equity play (buying Netflix stock), I prefer a more conservative approach. The stock has traded up a bit recently and the market isn’t looking so great. So the idea is to SELL Netflix puts 6 or more months away and at strike price lower than the current price (out of the money) The stock is at 61 right now, but you can get $2 or more for a Jun 50 put or $3.50 for a Sep 50 or $5 if you want to take it to Jan 2011. What this means (I know not everyone is an expert), is that if the stock goes below $50, which is 20% less than today, you will be assigned the stock (i.e. you must buy it at $50). If the stock doesn’t go under $50, you get to keep the premium. Sure, this is not an idea with a great upside and if NFLX goes to $100, you’ll still only get your $2-$5 in premium. So be it, I’m not greedy.<br /><br />Now, lets go check out the unburied corpse (Blockbuster). Without getting too “numbery”, lets point out that the company last October issued $675 mm in new SECURED 2014 bonds to pay down its credit lines. At the end of the year, the company was said to have $247 million in cash. Leading us to…<br /><br />Idea #3 Blockbuster secured bonds. Now trading around 71%, those secured bonds with a 11.75% coupon, yield over 27% to maturity…IF they pay. That of course, is the question. If and “how much?” or “how long?”. These bonds have an additional advantage, if you will, that they are a “sinking fund”, paying 3.33% back in principal each quarter. <br /><br />If Blockbuster manages to stay out of trouble, you would have your 71 cents back in about three years counting interest and principal. Any payments after that, be it the result of normal operation, restructuring, reorganization or bankruptcy would be profit. There would still be 60 cents worth of principal outstanding on the bonds at that point. <br /><br />Before you say, “they won’t last that long”, just look how long they HAVE lasted. And there are options for companies in these downward spirals: asset sales, cost-cutting, etc. I’m often amazed how long they can go on. Sometimes they even manage to “reinvent” themselves. Heck, Businessweek pronounced Apple dead over a decade ago.<a href="http://www.businessweek.com/1996/06/b34611.htm"target=_blank> LINK. </a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXLME7uEQPId196n4TIKSeGEpQvs4I0XZp0Jqh2_4sVKuYu2-TFCXLlCkWL9oHswq6FW0W9fTHtwoUal9AQOVgMzLUa4LDchcCDGOyAaCiXAgfAdHMbR5UcnR8xpxHWqQIbXhyVBv5daY/s1600-h/Appledead.jpg"target=_blank><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 135px; height: 179px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXLME7uEQPId196n4TIKSeGEpQvs4I0XZp0Jqh2_4sVKuYu2-TFCXLlCkWL9oHswq6FW0W9fTHtwoUal9AQOVgMzLUa4LDchcCDGOyAaCiXAgfAdHMbR5UcnR8xpxHWqQIbXhyVBv5daY/s320/Appledead.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5436018275907700226" /></a><br /><br /><br />There is a lot at stake, namely the CEO pulls in over a cool million a year and the top execs all over half a mill. I wouldn’t personally give that up without a good fight.<br /><br />Bringing us to…<br /><br />Idea #4 for the greedy and the optimistic. No, not Blockbuster stock. That’s for the foolhardy. This one is Blockbuster UNSECURED 9% 2012 Bonds (Maturity 09/01/2012), currently trading around 22% of par for a YTM of 93%. I guess it’s obvious that the market doesn’t expect these bonds to be paid in full and on time. Being unsecured, they are behind the secured bonds in a reorg or a bankruptcy and could come out of such an event with nothing. <br /><br />But then again, 22% is pretty close to nothing already. There are many possibilities, not excluding the company tendering for these bonds (say at 30%...like Ford did early last year) or some sort of discounted swap. If Blockbuster can buy back or somehow write off part of its obligations at a deep discount, it can make the remaining debt more payable. <br />These kinds of maneuvers are what make investing in distressed assets interesting, and this is distressed for sure. Expect it to be interesting, in the Confucian sense (apparently he never said that…). <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYqDdvAo_d1zdQZPAFU2VR68qUCRZhnbu1yvaanhELmDZxc8_OifBAO7ZGpdyEg9Ljb8aLI01MyQ_mmsYjmMbXUbvWS_dQlO4TTMQ51uy3bPuAIAuLH0NGtjicOetSNy_p98mgMrxWVMs/s1600-h/Videobonds.jpg"target=_blank><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 99px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYqDdvAo_d1zdQZPAFU2VR68qUCRZhnbu1yvaanhELmDZxc8_OifBAO7ZGpdyEg9Ljb8aLI01MyQ_mmsYjmMbXUbvWS_dQlO4TTMQ51uy3bPuAIAuLH0NGtjicOetSNy_p98mgMrxWVMs/s320/Videobonds.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5436018188044601186" /></a><br /><br />Ok, so there it is. I blogged a long blog this time. For those who didn’t bail halfway through: a thought. Think about these wars and those like them. The winners, the losers and the implications. Keep it in mind next time someone offers you some commercial real estate, a bookstore or a bank or gives you a DVD for Christmas.<br /><br />Here’s a classic clip from “The Holy Grail”. Quite Appropriate. <br /><br /><object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/p53kJX64ieQ&hl=en_US&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/p53kJX64ieQ&hl=en_US&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-3011727801882113130.post-46613433797482992712010-01-22T12:26:00.008-05:002010-01-22T12:45:01.096-05:00My Neighbors’ Mortgage<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMrAuxML0TfAScxMvAQTSH-GMdGx25NDGeleOy-qmhJm1eFM0zQSxoKFwwsjxPADgcZZzDKqRURAWaRidA2-KZ3CsXFrcocedUqaRGrEIJx87zTKrmsP3NV9_aDsOo77MRTUl1w2H6Bq8/s1600-h/IMG_51532.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 240px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMrAuxML0TfAScxMvAQTSH-GMdGx25NDGeleOy-qmhJm1eFM0zQSxoKFwwsjxPADgcZZzDKqRURAWaRidA2-KZ3CsXFrcocedUqaRGrEIJx87zTKrmsP3NV9_aDsOo77MRTUl1w2H6Bq8/s320/IMG_51532.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5429618952936696226" /></a><br />My neighbors are gone. They left several months ago. I didn’t realize exactly when, since I didn’t know them that well and frankly I don’t pay attention to those things.<br /><br />There is a sticker on the front door, placed there by the homeowners association stating that “We have determined that this residence is abandoned and have contacted your mortgage lender”.<br /><br />My curiosity was piqued. “What happened to these people?” A lost job, perhaps, or some other misfortune. Is the property for sale? Can I buy it dirt cheap? and so on.<br />I remembered that the property was up for sale for a short while, but then taken off the market again. <br /><br />Well, the interweb is a wonderful and scary place and the answer was there. I looked up the county records and voilá:<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUBOrACt1QSS4h2hf2f_Thj4XSgZMEtzGIDxSrRRowpy0rTI7LvBt2LsHulqZrMkMNpsuG0mFbNvq_FL0Re6HiZn2Za9jvAW1W5u0Cm4Pz4yv7zymnKRXxmRv23n-V5fZisC9fTmmKeRk/s1600-h/MNM.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 86px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUBOrACt1QSS4h2hf2f_Thj4XSgZMEtzGIDxSrRRowpy0rTI7LvBt2LsHulqZrMkMNpsuG0mFbNvq_FL0Re6HiZn2Za9jvAW1W5u0Cm4Pz4yv7zymnKRXxmRv23n-V5fZisC9fTmmKeRk/s320/MNM.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5429619031523080258" target+_blank/></a><br /><br /><br />I believe the table explains itself quite clearly, but in any case: they bought the property in 2002, with 20% down financing $205k for 30 years. Three years later, they refinanced for $342,400, probably at a better rate and pulled about $140k out. And then, only one year later, refinanced again with a $414,000 first mortgage and an $86,000 second mortgage tied to a revolving credit line (which I can only assume they used) and got themselves another cash-out for about $160k. <br /><br /><br /><br />So basically, my neighbors bought their house with about $50k down, and pulled roughly $300k out of it in four years. We all know what happened to the real estate market and now the house is listed at zillow.com with a value of approximately $340,000, but no way it goes for anything like that in an auction. <br /><br />I guess my neighbors just “walked away”. Can’t say I blame them. Sure their “credit score” will be shot, but that’s just “joining the club”. There are millions of Americans in the same boat. And it’s perfectly legal.<br /><br />They will be liable for some taxes once the bank forecloses on the property and sells it (owner is liable for the difference between the loan value and the sales prices), But who knows when that will be. I went to the bank to find out about the house. I figured it would a nice way to add an extra bathroom (or two or three) or have a place to put my mother-in-law when she comes for a long visit (totally worth it) or simply make a deal. <br /><br />From what I could gather, though, the bank has no idea the house is probably theirs, and very little interest in getting rid of it. They have not listed it in among their properties and I guess its not going to be on the market for a while.<br /><br />So it sits there, deteriorating. The homeowners association mows the grass and cleans up the garden. The paper is still delivered and usually winds up on my driveway. The crack dealers are moving in (just kidding!).<br /><br />One can only wonder how many more neighbors’ houses are still out there. Abandoned, but not foreclosed, sitting in residential real estate purgatory. <br /><br />Time to sell my Bank of America shares.Unknownnoreply@blogger.com9tag:blogger.com,1999:blog-3011727801882113130.post-61764912561279243362010-01-20T20:18:00.003-05:002010-01-20T21:00:55.972-05:00It Ain't Me, Babe.Sorry to interrupt this blog, but I've been getting inquiries about the Venepirámides blog, which I have linked under "Blogs I read". It's not my blog. I don't write it or know the person who does. I read it, find it interesting and whoever runs it was kind enough to link this blog also and send some traffic my way. <br /><br />When I was writing about Stanford, Venepirámides translated some of my posts into Spanish and published them there, for which I was and am grateful. I've also commented some of the posts there (using my name).<br /><br />Recently, Venepirámides has been blogging about the Venezuelan financial system, which I lost track of like half a decade ago, and that has a number of bankers either nervous or upset or simply wondering about their classification in the rankings. <br />And they're calling and emailing me.<br /><br />So to all the bankers, their friends and associates who are wondering...let me paraphrase Dylan.<br /><br />But it ain't me, babe,<br />No, no, no, it ain't me, babe,<br />It ain't me you're lookin' for, babe.<br /><br />I'm kind of partial to the Turtles' version (check out the go-go girls!)<br /><br /><object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/jcuX0CiXA04&hl=en_US&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/jcuX0CiXA04&hl=en_US&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-3011727801882113130.post-337701230539707612010-01-12T15:50:00.005-05:002010-01-12T17:19:29.890-05:00Not a Prophet in Venezuela<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCz7MLCSgXD3DrIPsO2lesRJXiUzZAhddmKdeUtiHSA5CZl8oOKtEq4cRgYXpqmjGlRR7RUhGpEIVbc_hNjgb5d5b3Ge4HM3OIpn7aMNnEIrTok-0pe-c2V5tgUn4ztoCxjEmPuKI0NYY/s1600-h/happy-holidays-card-flying-spaghetti-monster.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 277px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCz7MLCSgXD3DrIPsO2lesRJXiUzZAhddmKdeUtiHSA5CZl8oOKtEq4cRgYXpqmjGlRR7RUhGpEIVbc_hNjgb5d5b3Ge4HM3OIpn7aMNnEIrTok-0pe-c2V5tgUn4ztoCxjEmPuKI0NYY/s320/happy-holidays-card-flying-spaghetti-monster.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5425959878592386898" /></a><br />Analyzing Venezuelan bonds as an investment is a very sticky topic. On one hand, it’s very hard to be dispassionate about the issue, given the fact that I spent so many years in the country. On the other, there’s potentially good money in it, so one has to be practical and try to leave one’s emotions aside.<br /><br />I will start with some advice: if you live in Venezuela or conduct a good amount of business there, you should probably NOT invest in Venezuelan bonds. Doing so would violate Dalmady’s first law of portfolio diversification: “Never put you nest eggs in the same basket as your cojones”. While this law may be a slight contradiction to Lynch’s axiom: “Invest in what you know”, ask any Enron ex-employee, who found himself simultaneously jobless and penniless (their 401ks invested in Enron stock), which precept is the more important one.<br /><br />This is not to say one shouldn’t participate in the opportunities for participating in new offerings and quickly flipping these bonds for a profit, many of which have been good trades in the past few years. Those are arbitrages though, not really “investments”. <br /><br />As for the rest of you (or us…but mainly you), here’s my take. Veni bonds have been on a tear lately, as you can see in the graph below of the benchmark Ven 27 bond (click on it to get a larger picture). In the last 30 days, that bond is up from 67% to around 83%.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYP1lzhN71pFh5kpkCkguVlO1ShKI_D8-cqzMt8Bn1_ie8ZLaAqqdP3Q22t3XYj6NvwBQEokgMQb-hoCuVw3T04LPmPhQc8_7-QUpipz013uCxtgNgMAT-76nSsbmSIje_8mVRdgkMaWo/s1600-h/venz.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 229px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYP1lzhN71pFh5kpkCkguVlO1ShKI_D8-cqzMt8Bn1_ie8ZLaAqqdP3Q22t3XYj6NvwBQEokgMQb-hoCuVw3T04LPmPhQc8_7-QUpipz013uCxtgNgMAT-76nSsbmSIje_8mVRdgkMaWo/s320/venz.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5425959960570599170" /></a><br /><br />There are a few explanations for this. First of all, Venezuelan debt was lagging in the credit market rally that began in late 2008. And it was lagging so badly that it was surpassed by the likes of Argentina and other lesser credits (not mention countries like Georgia, El Salvador, etc…which enjoy still much much better credit terms).<br /><br />That fact wasn’t lost on the analyst community, which picked up on what they believed to be a bargain. Deutsche bank issued a note with a buy recommendation on PDVSA bonds several weeks ago and other analysts also gave their nod to Veni bonds. An analyst I spoke to at Credit Suisse was also very bullish on the bonds (while I shook my head in wonder). Analysts cite indicators, such as a relatively low Debt to GDP, Export Volumes, Substantial FX reserves, etc…which all seem to point out that Ven debt wasn’t as bad as its market price was indicating.<br /><br />After Friday’s devaluation, even S&P got in the act, revising Venezuela’s credit outlook to “stable” from “negative”. JP Morgan upgraded the bonds yesterday also. So there is a lot of momentum riding on this trade and it could tick up even higher from here. If you’re riding this wave, congratulations, if you’re looking for some action there may still be some here. Double-digit yields are becoming an endangered species in the credit world and Venezuelan bonds still offer those.<br /><br />Longer term, however, caution is the word. Although it’s hard, if not impossible to be a hometown prophet, I must point out the danger, Will Robinson. Buying Venezuelan debt is like lending money to a wealthy, eccentric and partly insane uncle. You kind of figure he’s good for it, but there’s a good chance he’ll blow his fortune buying real estate on the moon or something and leave you hanging out to dry. <br /><br />That is the kind of uncertainty you must deal with if investing in Venezuela. Chavez regime’s economic policies are entirely idiot-logical (i.e. only make sense to an idiot). Electric shortages are fixed by shutting down shopping malls, agricultural policy proposals include “vertical chicken coops” on rooftops in poor barrios and consumption of scarce products and services is dissuaded by keeping their prices low. If money is tight, just take some dollars from the reserves at the Central Bank and/or devalue. What’s more, when devaluing the currency, book an exchange gain and spend that, too. What? still not enough? Nationalize a bank or two or ten. Ponzi banks? Bail them out and take them over. Need more money? That’s why we have the “Casa de la Moneda” (currency printing plant). <br /><br />Corruption, deliberate misinformation and ineptness merge together to form an incomprehensible mess. There isn’t an official figure that can be trusted without an independent third-party verification. Inflation, unemployment, sure every country plays with those numbers…but also more basic, fundamental numbers are suspect in Venezuela. The “embellishment” of oil production figures has been well documented. But it could go deeper still. For example, the Central Bank puts FX reserves at $35 billion. Really? I’d need to see every single greenback to be convinced that that is the case. (Who audits the BCV? Think about that.)<br /><br />I know what some of you may be thinking: “Dalmady’s just another Chavez-hater who wants the Venezuelan economy to fail and Chavez to fall with it”. Nah. I’m afraid Chavez is a given, he’s not going away anytime soon, so I’d much rather the country did well than not. Less than a decade ago, Brazil was considered a greater credit risk than Venezuela. Now it’s “investment grade”. Venezuela, on the other hand, competes with the worst of the worst. It’s disappointing, sad and no “trend change” is in sight.<br /><br />It’s not like analysts aren’t used to uncertainty and contradiction, especially when dealing with government policy. Sure, measuring risk vs. expected return is how we handicap the game. In the case of Venezuela, IMO, there are just too many unknown variables and possibly disruptive scenarios to make an educated estimate. Expect the unexpected would have to be my best assumption. How do you put odds on that?<br /><br />So, invest and play the game of chicken with fate, hoping to be able to bail out before the inevitable collision (Oh, yes…it WILL happen) or sit on the sidelines just for the satisfaction of watching the accident and saying “I told you so”. You could be waiting a long time for your shot at schadenfreude. <br /><br />It’s a lose-lose proposition. I prefer to play some other game.Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-3011727801882113130.post-76762866276645227362009-12-30T07:21:00.005-05:002009-12-30T10:41:59.792-05:00Resolutions<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrrPJz5sr35OLCnBn0bA5TuDakgbX5xRo3TqBthR5S1JsYpgsyPQ3drRGOfzuB3E4rlfOtSHpTyT3YpU6YwHhbeON76GtmeFkSaczISUpdV4NWQdSKRE4-xP8c-oDsWwjeHGQlRtL7JFk/s1600-h/IMG_1743.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 240px; height: 320px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrrPJz5sr35OLCnBn0bA5TuDakgbX5xRo3TqBthR5S1JsYpgsyPQ3drRGOfzuB3E4rlfOtSHpTyT3YpU6YwHhbeON76GtmeFkSaczISUpdV4NWQdSKRE4-xP8c-oDsWwjeHGQlRtL7JFk/s320/IMG_1743.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5421054819566871506" /></a><br />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.<br /><br />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.<br /><br />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. <br /><br />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.<br /><br />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?<br /><br />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). <br /><br />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!<br /><br />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.<br />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. <br /><br />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. <br />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. <br /><br />So, have a really peaceful and joyful rest of this holiday season, a great year in 2010 and thanks for reading my junk.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-3011727801882113130.post-19418905910352597822009-12-15T12:48:00.005-05:002009-12-15T13:00:59.431-05:00Online Junk<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQKUUrkRaDkQQi9bgzo5o6TSs8sL8Zrzkde8Kk3v2TKYYTaZ1zrn5poyp6yLVlYasMCPlhprBBRZ77ju9dBRwHpqzRpXn2h2iQdmrDLR1I3N3kkBdLFKdYLoYHIZzVYDaXM-RRmN6n32Y/s1600-h/129053726277503270.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 213px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQKUUrkRaDkQQi9bgzo5o6TSs8sL8Zrzkde8Kk3v2TKYYTaZ1zrn5poyp6yLVlYasMCPlhprBBRZ77ju9dBRwHpqzRpXn2h2iQdmrDLR1I3N3kkBdLFKdYLoYHIZzVYDaXM-RRmN6n32Y/s320/129053726277503270.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5415524203859237202" /></a><br />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. <br />I’ve looked around a bit for some family members and myself and I’d like to share some of those findings.<br /><br />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. <br /><br />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. <br /><br />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. <br /><br />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.<br /><br />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.<br />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.<br /><br />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. <br /><br />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).<br /><br />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.<br /><br />For beginners, most of the online discount brokers get their offerings through a platform called “Bonddesk” (http://www.bonddeskgroup.com), 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. <br /><br />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).<br /><br />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.<br /><br />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). <br /><br />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. <a href="http://seekingalpha.com/article/2652-bond-buyer-s-tip-how-to-get-price-quotes-from-your-bond-broker"target=_blank>LINK</a>).<br />If it is a bit complicated, you can call customer service and they will work you through the process of buying and selling. <br /><br />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.<br /><br /><a href="http://www.etrade.com"target=_blank>E*Trade Securities</a>. 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. <br />The search tool is good and you can even access a particular bond's trading history with a link to the TRACE system. <br />Investment Grade, High Yield and even defaulted bonds are available for purchase.<br /><br />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?). <a href=" http://personal.fidelity.com/accounts/pdf/FBS-BKCOMMSCHED-0105.pdf"target=_blank>LINK</a><br /><br />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. <br /><br />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.<br /><br />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).<br /><br />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).<br />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). <br /><br />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. <a href="https://www.zionsbank.com/zd_prod_bonds.jsp#4">LINK</a><br /><br />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.<br /><br />In conclusion, the retail investor CAN find a way to trade some corporate bonds online. It’s not easy, but it can be done. <br /><br />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!<br />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).<br /><br />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.Unknownnoreply@blogger.com2