1. Goldman Sachs Ups Forecast for 2nd Half Growth: Last week, the economists at GS increased their forecast for inflation adjusted growth in the second half of 2009 to 3%, but see that rate declining in 2010. Some economists still believe that consumer debt levels are too high, having hit a historic high of 133% to disposable income in 2007. USATODAY, and falling modestly since that time to around 124% by March 2009, still well above the norms for the 1980s, according to the WSJ Another view is from this author who maintains that household debt burdens have not materially increased over the years. Personally, I like to look at these charts provided by Invesco that show how we got into trouble in graphic fashion: www.invescoaim.com/pdf/
2. Bought 100 of the TC IPB at $16.99 (see Disclaimer): This Trust Certificate contains 16 bonds maturing between 2029 and 2033. I have been aware of IPB for a few weeks. I initially passed on it since it required too much work to determine whether it was selling at a discount to the value of the underlying securities. I did a back of the envelope kind of analysis on Sunday, and concluded that IPB was selling at a discount to the value of the underlying securities. So I bought 100 shares this morning at $16.99 in the Roth IRA.
This is a link to the prospectus: www.sec.gov
Par value is $25. Interest is paid semi-annually at the initial rate of 6.0518%. There are several events that will ultimately impact the initial rate. As each bond matures, the Trustee will collect the principal and disburse to each holder their pro-rata share. So, starting in 2029, I would anticipate a decline in the interest rate to reflect the loss of interest paid by maturing bonds. It is also possible that one or more bonds may go into default before maturity, in which case the Trustee would sell the bonds and disburse the principal, and this would also reduce the interest rate payable.
The fifteen corporate bonds in this TC have identical principal amounts, $2,213,000. They are joined by zero coupon U.S. Treasury STRIPs due in 2030 in the principal amount of $4,305,000. So, I am not concerned about that one, though its presence does explain why IPB was purchased in a retirement account. Zero-coupon bond - Wikipedia, the free encyclopedia
When I looked at the list of corporate bonds, I recognized that most of them were available in Trust Certificates. Now, this TC does not contain other Trust Certificates. But, it does contain the underlying bonds in other TCs, so I could compare the cost of duplicating IPB by buying equal amounts of TCs containing the same underlying securities and by buying the bond in the bond market when no comparable TC was available. This analysis would need to be done with more accuracy if I was going to buy more than a 100 shares.
First, I will compare the prices of the bonds that were not available in TC form:
(1) The JNJ bond bond maturing in 2033 has the symbol JNJ.GM and is an actively traded bond in the mid 90s. So, I am buying that one at a significant discount in IPB which is selling at a 32% discount.
(2) The VIACOM bond is now an obligation of CBS, as a result of the split from VIA, and its symbol is VIA.GW. This one is currently selling at around a 25% discount to par value.
(3) GMAC bonds, which I would much prefer to avoid, are available as exchange traded bonds, and there is one maturing in 2031 with a lower coupon, GMA, that sells now for around $16.3 as of Friday's close. So, that one, I am paying too much by buying the TC IPB. I would not buy this one separately, but I have to take it when buying IPB.
(4) The Verizon bond maturing in 2032 has the symbol VZ.RB and is trading at over a 10% premium to par value. So this on is at huge discount in IPB. A Verizon bond maturing in 2030 is available in TC form, PJL and XFL, and I currently own both of those. And, both are selling now at small premiums to their par value.
The remaining bonds are underlying securities in Trust Certificates. The following table is self-explanatory. I first name the company, the coupon of the underlying bond, the symbol for the TC containing that bond (all $25 par value securities), its coupon and last Friday's close of the TC, no further discussion is necessary:
Boeing 6.125% HYM 6.125% $24.87
Credit Suisse 7.125% DKY 6.25% $21.5
Daimler 8.5% PYO 7.25% $$19.88
Ford Motor 7.45% PJE 8.25% $17
General Electric 6.75% PJT 6.05% $21.98
Goldman Sachs 6.125% DKW 5.63% $19.61
May (now Macy's) 6.9% DKQ 6.25% $14.51
Time Warner 6.625% GJG 6.125% $19.67
Valero 7.5% PJZ 7.25% $23.12
Weyerhaeser 7.375% HYH 6% $20.85
I loss interest in finding a comparison for the Citigroup junior bond maturing in 2033 contained in IPB, so I took the TP issue, C-PR, which also matures in 2033 with a higher coupon. It closed at $17.66.
So, that is something of a simpleton approach to the issue, but it does give me enough to see that IPB is selling at a discount to what I could do now to duplicate the holdings.
One other benefit to this security is that it is like buying a unit investment trust with bonds maturing in 2029 to 20033, without the fees. Once I buy the TC, pay a small brokerage commission to buy the shares, I become the beneficial owner of my pro-rata share of these bonds. Other than a small fee to the trustee I am done with paying "expense ratios". So, I achieve some diversity without having a manager clip say 1% of the NAV a year in fees to underperform a dumb bond index.
One drawback is that IPB does include some bonds that I would not buy. GMAC is one, and I am not too crazy about the Ford Motor either. The Daimler bond is now an obligation of Daimler's U.S. operation, and is guaranteed by Daimler AG. FINRA - Investor Information It is an investment grade bond. I would take less interest if I could just substitute bonds from other companies for those Ford and GMAC bonds, but that is not an option of course. So, when I bought this TC, I had to take the bad with the good. As far as I know, GMAC was not part of the GM bankruptcy (though I have not researched the issue), and Ford is still paying.
After doing all of this work, I just entered a market order to buy 100. This security trades less than a 1000 shares a day on average. There was a 700 share block that traded before me at $16.77, so the patient might be able to buy at a lower price than I did this morning. I just wanted to move on to other more pressing issues, besides, even for skin flint, cautious, every nickel counts Tortoise, $20 is not that much money. The yield at my cost is around 8.9% plus any profit realized as the bonds mature and principal is paid.
3. European Commission Show Trials-the Intel vs. AMD Competition: One way to reach the result desired is too sweep all exculpatory evidence under the rug. The end result is a Kafkaesque show trial that only has the appearance of reaching a fair result. I have come to suspect that the European Commission's omnipotent antitrust regulator reaches a conclusion first and then sifts through whatever information supports the conclusion, discarding inconsistent information. Normally, the investigators for the Commission would develop a written record of the testimony given by key witnesses, unless of course the witness provided exculpatory information. An investigation by the European Ombudsman, P. Nikiforos Diamandourous, revealed that no record was prepared when a Dell senior executive was interviewed about Intel's sales practices. Why? The reason is apparent, the evidence provided by him was inconsistent with the what the Europeans wanted to do, fine Intel for competing with AMD. WSJ Reuters Once this kind of practice is quickly turned up when someone looks underneath the rocks, and given the secrecy involved in these proceedings, then it is natural to wonder how many times information has been distorted or dismissed, or relied upon when credibility issues would suggest no good faith reliance was possible.
There is not any resemblance to fairness in the European approach, where the Commission acts as judge, jury, prosecutor and executioner, usually for successful American businesses. There is certainly no meaningful checks and balances to prevent a governmental abuse of power. The end result is a Stalinist type show trial. Maybe that is somewhat of an exaggeration, but it is at least debatable whether it is or is not an exaggeration. The impression given to me at least is that a great deal of their fines for anticompetitive conduct is either political or an innate distaste for competition.
4. Tortoise Rules of Investing: Cramer has his rules and I have mine. I am going to name my the "Tortoise Rules of Investing", and will simply codify them over a long period of time in this blog. We are all familiar with Aesop's fable about the Tortoise and the Hair. Well, I am that Tortoise.
(a) Rule 1: Slow down and think
Make no investment decision quickly. Time needs to be devoted to researching and thinking about every investment, identifying the strengths and weaknesses, the pros and cons, and making a careful assessment of the potential risk and benefits.
5. Baltic Dry Index: I try to look at this index once a week, and it has taken a turn for the worse. The index peaked in June at 4291 and has been trending down recently, closing at 2772 last Friday. Bloomberg.com: This index tracks global shipping prices for various kinds of dry goods. The total decline from its high on June 3r is 35%. While this indexes recent weakness is not ominous, it does suggest that China may be winding down purchases of commodities. China's purchases of iron ore and coal appear to be slowing down. Some of that weakness may be due to delays in shipments caused by the Chinese steelmakers haggling over prices with iron ore producers in Brazil and Australia.
I also read a story in Forbes that the Chinese have imported far more copper than the country needs, with one estimate penning the total excess supply at 460,000 tons.
Copper has had a big rally. My sole exposure to an individual cooper company is 100 shares of Taseko Mines (TGB), a lottery ticket last bought at 80 cents a share in the Roth IRA.
There was also a story over the weekend that China was not going to tighten monetary policy anytime soon.
6. Sold 50 SEA and 100 TGB (see Disclaimer): After looking at the Baltic Dry Index issue and copper prices, I decided to unload my lottery ticket in TGB at $2.5, for about a 150% or so gain. I also sold the ETF SEA, which contains shipping company stocks, at $12.77, recently bought at $11.99: General Mills/ISM Report/MS Raises Estimate for Intel's 2009 Earnings/ Bought 50 SEA Instead, I am going to buy, maybe this week, one of the components of that index as a lottery ticket in my regular IRA. These two sales are generated by RULE 2 of the Tortoise playbook of rules:
7. Rule 2 of the Tortoise Playbook: Taking small profits, like taking small steps, is okay. It is also okay to move the soft body parts back into the shell, that is what the shell is for after all, when danger is sensed. It is not important if the danger passes without incident. The objective is not to have the head cut off. Once the danger passes, then the Tortoise can stick his neck back out, take a sniff and a look see, and proceed possibly on the same track.
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