Thursday, October 9, 2008


When walking on egg shells, I never take anywhere near a full position at one time, and I am embarrassed to even admit that my first order early this morning on AGC was a 50 share lot at 5.55 and then it fell another 20%.   I have already averaged down after this abrupt fall with the other 50 bought where in is trading about 20 minutes ago near 4.6.  That is a first for me.  I do not know what the NAV is today but we have to be nearing a 50% discount to NAV at the current price. The dividend on this one was already cut from .$1458 in September to the current .095%.  I suspect that dividend cut would cause many individual investors to dump it.  As of 8/31/08 70% of assets were in convertible securities  and the remaining almost equally divided into high yield, bank loans and stocks. As I mentioned in the last blog, another negative factor in this market is the leverage which is close to 35%.  The leverage is achieved via auction rate securities, which I have never bought thank goodness, and the auctions started to fail in February 2008.  Anyone owning those securities got stuck.  Some closed end funds have refinanced those types of securities but it does not appear that Advent Claymore has done so. The semi-annual report does not say with specificity how the default rate is calculated on these securities, but says merely that is determined by a multiple of or spread to LIBOR.  This is not good and it is certainly a very poor explanation for someone trying to determine the impact of the borrowed money rate on the desirability of buying AGC.

We are getting closer to the lows reached in the last bear market when the Dow closed at end of September 2002 at around 7592.  It hit intraday 7181 in October 2002.  The subsequent rise to 14000 was thus near a 7000 point rise in the Dow, and we have clearly retraced far more than 50% of the bull's  market's gain from 2002 to October 2007.  When it gets this bad, you almost have to expect more pain to come from the current level of 9186. I am more positive now that I was a week ago given the strong actions that central banks and governments are taking around the world.  The idea floated by Paulson of making investments directly into banks as opposed to buying the bad paper seems to me to be a better idea, in that it would directly inject capital into the banks without having to go through the process of trying to buy bad paper that is hard to value.  This appears to be the U.K. model but one of the banks, HSBC, did not want the government involved in that way.  BBC NEWS | Business | Rescue plan for UK banks unveiled

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