Wednesday, December 17, 2008

Rally In Long Term Investment Grade Corporates/TBT/BTE/AVY/REITS

1. Buy of TBT as a Hedge/Treasury and Investment Grade Corporate Bond Spreads: I am starting to see some serious upward movement in the prices of the higher quality, long term investment grade corporate bonds.  Based on the data that can be accessed by individual investors free of charge at the FINRA web site, the senior At & T bond maturing in 2031 has almost returned to levels prevalent before the bond market meltdown in October, selling now well in excess of its par value.   FINRA - Investor Information - Market Data - Bonds - Bond Detail  This is the underlying bond in the TCs JZJ and JZE.   The underlying bond in the Verizon TCs PJL and XFL has likewise staged an excellent recovery according to the recent FINRA trade data.FINRA - Investor Information - Market Data - Bonds - Bond Detail  I will continue to add to my long investment grade corporate bond position.  I mentioned that I might accelerate a hedge on that position with an inverse ETF.  I have decided to hedge my long term corporate bond position with the Proshares UltraShort 20+ year treasury ETF (TBT)
(this is not for the faint of heart, TBT has fallen from around 70 in July to 37 now as the long treasury bond has staged a tremendous rally)  This is not an investment but insurance against a now weighty existing long corporate bond position.  I am going to break the buys into three orders and will only do a small partial hedge, possibly extending the buys to as much as 200 shares-in total, starting with the first buy sometime before the end of this year.  I view the 20 year treasury bond market- at the current valuations-to be rational only under a long term Japanese style deflation.    Although I may be wrong, I do not view the Japanese historical alternative as the likely long term outcome for the U.S.  Many of the long term corporate bonds recently purchased by me over the past two or so months now have a yield spread based on my cost of over 10% annually compared to the comparable treasuries.  I would like to keep them as long as I can, and a hedge developed by buying TBT may keep me in a full position longer.  Otherwise, I would be partly shaken out of my long corporate bond position when inflation returns in a serious way.  I will as a matter of personal preference always do some selling at the first whiff of trouble to be taken seriously by serious and informed people.  Inflation can certainly be a lot of trouble for a long bond.   Moreover, my predisposition is to sell any asset that hits a 50+ year peak in pricing regardless of the consensus opinion attempting to justify the rise in the price to such historical levels.   I do not own any long dated Treasury paper.  If I did it would be sold by me tomorrow.  That would probably be a mistake if we slip into the Great Depression II.   The WSJ market data page this evening has the 10 year Treasury at 2.2% and the 30 year at 2.65%-sold to you.  My prediction is just that, a prediction about the future, which may end up being wrong, but I have to act based on my own opinions and that is what I will do. 

2.  Baytex: Baytex became the latest Canadian energy trust to cut its monthly dividend, reducing it from 25 cents Canadian to 18 cents. Yahoo! Finance  I do not have a position but have been considering establishing one.  

3.  Downward Earnings Revisions: I am continuing to see revisions in earnings estimates that were given only a few weeks ago. This indicates an even greater acceleration of the downturn.  The latest came from Avery Denison that revised the earnings warning given in October further downward. Reuters
Newell Rubbermaid also slashed its estimates for the 4th quarter. Finance
I have never owned Newell Rubbermaid and I sold my position in Avery earlier in the year.  I do not intend to add it back anytime soon.

4. Mary Schapiro: I certainly hope Mary Schapiro hits the ground running at the SEC.  NYTimes.comChris Cox has been a disaster.  I met Mary about 30 years ago when she was a student and hired to work part time at my firm in Washington, D.C.   She is capable. 

There is an excellent article in the WSJ about the large number of the leading names in the "fund-of-hedge-funds industry" who were duped by Madoff.

5. Downbeat News from the WSJ on REITS: The downbeat news concerning the REIT industry continued unabated today with an extremely negative article in the NYT about the acceleration in commercial mortgage defaults especially in the New York market.   This article relies mostly on data provided by Real Capital Analytics which showed at least 107 billion of commercial properties in distress, in default or headed in that direction.  The Fitch rating agency continued its negative assessments by noting the liquidity strains on the REITS balance sheets. MarketWatch  My position is mostly in cumulative preferred stocks issued by REITS.  I am not ready to bail on the minor position yet.   

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