MADOFF: WHAT IS DUE DILIGENCE/INVESTMENT GRADE CORPORATES & LQD

Barron's has an interview with a financial advisor, James Hedges, who met with Madoff and refused to do business with him.    Hedges, a graduate of Rhodes College in Memphis, clearly sets out the case why any due diligence by an advisor would result in just walking, if not running, away from Madoff.  Barrons.com  He also provides the reasons why some financial advisors were so eager to do business with Madoff.  He says that Fairfield Greenwich allegedly received huge sums for steering their clients to Madoff. 

Hedges was following what I would consider due diligence as an investor.  Since I have never hired an advisor and never will, I have not thought about the issue much until now.  Madoff apparently refused to give Hedges audited results or to answer routine questions about his operations.  If audited results had been provided, I would then expect the advisor to check out the accountant.  The red flags raised by Hedges conversation with Madoff were large, flashing red, with bells, whistles and a piercing siren so loud that the tone deaf could hear it.  The red flags discussed in this interview could not have missed or overlooked by any thinking person.   I would also believe, as I stated earlier, that someone paid to check out Madoff would have to exercise a heightened level of due diligence due simply to the fact that the statements and trades were generated in house.  Most of the money given to Madoff will probably not be recovered.  Apparently, based on the story in the WSJ this morning,  he did not attempt to make money for the investors by performing any trading.   The lawsuits can be expected to fly against outfits like Fairfield Greenwich and Tremont Capital, and I will anxiously await to read their defenses.

 

 Randall Forsyth has an article in the online edition for Barron's explaining why investment grade bonds still look attractive even after their recent  rally. Barrons.com   Forsyth mentions the ETF for investment grade corporate bonds, LQD, which has had a nice rally since I bought it at 90 a few weeks ago, now trading over 100.  (from 11/26: LQD AND POM) LQD: Summary for ISHARES GS $ INVESTO - Yahoo! Finance I bought LQD to replace the poorly performing Loomis Sayles retail bond fund in my portfolio, which I have not yet sold.   I can still use tax losses for this year since I still have both a net long term and short term capital gains.   But now, I have to decide whether to even hold on to LQD due to its 10% rise in less than a month.  It is interesting that I have done well selecting my own bonds this year and I am likewise positive with my ETF bond selections.  Where did I falter in my bond portfolio in 2008?  I lost with bond mutual funds allegedly being managed by professional, experienced, and highly compensated individuals. 

 I really do not want to trade LQD.  It fills a hole in my bond portfolio.  However, I can easily substitute some investment grade bonds for it, receive a higher yield, and book a 10% gain now.   I am not going to do anything about it this year.  There are always options to consider.