Wednesday, December 31, 2008


I decided not to go see my oldest nephew perform tonight at the Ryman.  It is just too late for me to stay up.  I am usually well into my REM sleep when he is scheduled to appear in concert.  I would mention to Tyler that I commend him for adhering to an old man's recommendation about limiting losses, which was simply never bring more than $300 to the tables and never go into your pocket after reaching that number. If you need more than that, you need to go back to the books and to learn more from experience at lower numbers.  I would also say that even a brilliant 18 year old novice should not try to strut his stuff at $100 a hand. Really, that is my new year's piece of advice for you. It is best to understand that mental acuity is not sufficient in all circumstances and certainly not all of the time.  Playing at a $100 a clip would have made me a little nervous in my younger days, but I have not played in a long time.  I doubt that it would bother me much now.  When I say I am a gambler, I mean that I have a gambling mentality and have had it- as far as I can ascertain -from birth.  Yes, I was born with some peculiar gene I suspect. I limit my gambling to the tables at the NYSE and Nasdaq.  Now, almost nothing makes me nervous anymore.  This market in 2008 did not make me nervous.  I am ready to roll in 2009.  

There was not much to be thankful for in 2008 when focusing just on the markets.  I am just glad that I lived to see a bowl win by Vandy.  I do not remember the last one in 1955 and I doubt that it was televised anyway.  Go Dores.  I am really looking forward to basketball and baseball in 2009. 

While I normally would under-weight long corporate bonds, due to inflation risk and the need to constantly monitor them for credit risk issuesTrust Certificates: Issues with Long Term Corporate Bonds, I have recently gone to an over-weight position based on factors deemed more important than those risks.  The first consideration is my age.  A long corporate bond maturing in 2028 to 2038 would provide income to me for the likely remaining years of my life. The second consideration is that I found abnormal buying opportunities during the September to December time frame in investment grade corporate bonds, particularly for long corporate bonds contained as the underlying bonds in Trust Certificates.  Most of these long bonds will provide over 15% per year at my cost, adding both the current coupon and amortizing annually the spread between cost and par value.  Many provide more than 15% just on the current coupon. Third, as part of my dynamic asset allocation model, I am constantly alert now for any opportunity to increase my bond allocation.  I am of course increasing the percentage allocation to bonds as I age. I just kept buying over the last three months until I realized that I was significantly over-weighted in the long bond category. This was when I decided to start hedging part of the position with the double short ETF for the long treasury for the reasons previously discussed.Madoff: Need for Trades/Statements from Independent Broker/CIT bonds/Pricing Discrepancy in Aon TCs Rally In Long Term Investment Grade Corporates/TBT/BTE/AVY/REITS
The hedge will have to be managed but it does give me a degree of inflation protection for the long position and both the hedge and the long corporate bond position may work over periods of time given what I perceive to be an over-valued long treasury bond. 

I also started an allocation to floating rate preferred issues during this time period since they were being seriously mispriced in my opinion for securities that would provide some inflation protection due to the float provision and deflation protection in their guaranteed yield that only became attractive to me recently as a result of their substantial fall in price, as I have explained.Inflation or Deflation: Bond Alternatives/  Seriously, even taking into account their drawbacks, where would I get a 14% guaranteed yield that could rise if the percentage float over 3 month LIBOR gave me a higher rate than the guarantee.  I did several calculations in these blogs back in October showing how much extra yield would be generated by 3 month LIBOR moving to just 5%.  So there were many moving parts in this change in asset allocation.   I also went back into my TIP position. TREASURY INFLATION PROTECTED BONDS (TIP)  Before an individual investor delves to deeply in bonds, there is a need to become knowledgeable about them and I did provide some links that would be a mere start in that long learning process in a prior post. LINKS TO GENERAL INFORMATION ABOUT BONDS:

The individual bonds in my asset allocation are divided into terms, short, intermediate and long.  Each term has sub-categories.  The long bond will have investment grade senior or even secured bonds with a minor allocation to junk, perpetual rate preferred stocks with no maturity (under-weighted),  cumulative preferred securities with no maturity, and Trust Preferred issues usually issued by banks that will have a maturity date usually way out into the future (under-weighted since many contain unfavorable provisions such as  5 year deferrals of interest frequently permitted and many are cumulative which can have adverse tax consequences as explained in their prospectuses).   Within short bonds, the maturities will be staggered by year and spaced out during the year.  Mostly these will be senior bonds issued by seasoned issuers but sometimes a junk bond will be added such as DKR.  A term category has Bond ETFS assigned to them, with most of the intermediate bond category covered by the average maturity of several bond  ETFs.  Most municipal bonds are intermediate term with an emphasis on Tennessee municipal bonds.   Inflation protected  securities are a special category within bonds which would include ETFs, TIP and WIP, and the floating rate securities tied to LIBOR, CPI, or some other security whose price may rise due to an increase in inflation and/or inflation expectations like the 3 month treasury bills (e.g. METPRA, AEB, GSPRA, OSM, PFK (NOT OWNED), PYV AND MANY OTHERS)   

A question came into HQ about the AEGON perpetual preferred stocks.  Both AEGON and ING have been under a lot of pressure this year, with some of the reasons discussed in earlier posts. Both eliminated their last common stock dividend and received financial assistance from the Dutch government on what I viewed as favorable terms for me as a preferred shareholder. I mention back then several Aegon preferred stocks that were yielding 16 to 18%.    Whiplash By A Manic Depressive & ING Preferred   ING does not have any publicly traded floaters to my knowledge. At the time that I added AEB and the ING preferred issues, having some concern about both Aegon and ING, I elected to buy the Aegon floater (AEB) and the ING perpetual preferred stocks on an opportunistic basis.  Any buyer of junior securities has to look at the credit risk awfully hard.  As cash flow moves into my main account, I am more likely to add to other asset classes other than bonds at the current time.  However, as shown by the recent small added of a REIT cumulative preferred, I am open to securities giving me 15+% yields and the Aegon perpetual preferred stocks are on my list to seriously monitor along with close to 50 others.   

There has certainly been a great deal of discussion about bonds and bond like investments in these blogs since I started to write them. Before I reached 40, I thought a bond was some kind of old man's disease.  I do not even consider myself now a bond investor. Readers of my emails over the years know that bonds rarely entered into my discussions until 2007.  I really just like to talk about small cap stocks.  I am being forced into buying bonds due primarily to my age and views on appropriate asset allocation models.  

I am going to substitute a photo for a week or so from a time when I had more hair. I had to go a ways back to find one-like 40 something years. I wonder if Will will let me have some of his since he is starting to look a bit like that Illinois governor above the forehead. I wonder whether anyone will notice the change. 

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