Monday, October 13, 2008


The last bond purchased today was a TC containing a senior 6.9% coupon bond originally issued by May Department Stores which was later acquired by Federated.  Then Federated changed its name to MACY's. The common stock of Macy's has fallen on hard times selling near 10 (M), and I sold my common shares some time ago near 30.  I thought about going back into the common but this bond looked more attractive to me today.  Macy's just issued a warning and I would anticipate earnings to be under pressure for several months, maybe well into next year.  As a bondholder rather than a stockholder, I am just interested in whether Macy's can pay me interest and not go belly up on me.  As of this moment, I am not concerned about a bankruptcy but I am concerned about earning's growth so I bought the bond rather than the common stock. 

The TC containing this bond has a lower coupon at 6.25%.  I bought 50 of DKQ near the close at 10.35.  It has a $25 par value.   Maturity is 1/15/2032.  For most of these long bonds, I will probably never come close to holding until maturity.  There is just so many unknown risks which will occur over 25 years, including inflation and a rise in long rates that could be devastating to a holder of a long bond.  At the moment long rates are benign and I view today as near the end point of a long term secular bull market in long term bonds.  Inflation will return.  I am buying these bonds at such a discount to par value that I am currently insulating myself from part of that danger.  This TC DKQ has an effective yield of 15% based on my cost of 10.35 and that gives me the possibility of some quick upside in the event the market settles down.

I remember what it was like in the late 1970s and early 1980s when inflation was running rampant, hitting 13.5% in one month, and  the three month T bills were yielding 14%.  I kept my money short term back then which was a mistake after Volcker clamped down.  It would have been best at that point to go as long as I could, buying 30 year Treasury Bonds that were yielding 14% and  the 30 year Treasury back then would have been the best possible investment at that time even beating stocks that were set to begin an epic bull market in August 1982. But, as you would expect, until Volcker hit the brakes hard to bring down inflation, the long bond had just gotten killed if you had bought in the mid 1970s.   I was looking in the rear view mirror rather than trying to see into the future, that I should have accepted the Fed's offer to pay me 14% for 30 years in a non-callable bond when the Federal Reserve got really serious about bringing inflation under control.  

 As shown by the spiraling down of the TIP the past few days, inflation is not feared now,  with TIP down about 10 points in a week and  about 4% to around 91 at one point today.  But I fear inflation is not dormant, and will return particularly with the printing presses working full time now.   It would certainly  be best to lighten up on the long bond holdings before it rears its ugly head.  Just a word of caution about these long bonds that an old hand here at Hall Global is buying now at prices to tempting to ignore.   Most of my bond market holdings are tilted toward short term dated issues which I will hold to maturity.  These long dated paper securities are more trades for me, but I may end up holding some of the better ones in one of the  retirement accounts for much longer than I will hold in a taxable account. 

As with all TC purchases, I have reviewed the prospectus and I am familiar with the common stock.  I will generally buy bonds only in those businesses where I have owned the common stock, or still own it, and continue to the follow the company regularly with a few exceptions like today's purchase of a Hertz TC.    I also look at the price of the  underlying bond  in the bond market.  The CUSIP for the bond in DKQ is  577778BQ5.  The last major institutional purchases that I have found were in mid September 08 at around 81 and 83 on the 100 par with some small trades by individuals since then in the mid 70 range which I always disregard in making my decisions.  The TC is currently selling at about a 60% discount to par value.  This stuff is just beyond the comprehension of a financial journalist who has to be spoon fed.    IT is fairly easy to understand that these securities are being fundamentally mis-priced due to individuals dominating the trades in the TC market.  With that domination,  there naturally comes short term risks and opportunities as prices swing irrationally in a broad range.

There was just an incredible price discrepancy this morning in two TCs containing the same bond, like a 40% price difference with both TCs being priced substantially under the underlying bond's value.   For a sober and rational mind, it takes some getting use to a constant stream of bizarre behavior.  Someone came in and corrected it, by bringing one of them up almost 40% in price intra-day.  But there is always irrational behavior.  Look at INZ which I bought last Friday at around 7.73-up 61% today to 12.47.  Which price is the right one, 7.73 or 12.47, or is neither the right price.  I did not sell today to capture that gain.  I am sure that I would if you gave me tomorrow another 4 dollar gain, maybe less since I do not wish to greedy on a security such as a preferred stock with no maturity.  Another security bought Friday was PJS, a TC, at around 7.2 and it was up 44% to over 10 today.  A preferred stock issue of Key Corp added late last week the day before going ex dividend rose 65% today (KEYPRA).  The Hertz TC bought today rose almost 50%. This is just nutty.  What else can you say.  I try not to get excited about the ups or the downs.

In full disclosure, I own shares of DSQ and MAY continue to buy additional shares at or below the current price, or even slightly above.  This is not a recommendation to buy or to sell.  Trade at your own risk, and perform research about this security by reading the prospectus at and further studying the financial health of MACYS (symbol M at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase.  This security may not be suitable for others based on their unique financial position and risk profile.  THE PROSPECTUS ON THIS TC CAN BE FOUND AT SEC.GOV
This TC is a MS structured Saturn origination, series 2003-7.

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