I did listen to the first ten minutes of Obama's speech on the economy, and he does have a firm grasp on the factors that led to the current crisis, previously identified and discussed at great length in my posts. This has to be contrasted with W, who did not have a clue when Bernanke and Paulson first told him about the trouble shortly after the seizure of the Fannie & Freddie and the original bailout of AIG. Accurate Information is Not a Side to an Issue/ W & the Housing Crisis/Lying Works In Politics
I have serious policy differences with Obama but even his critics have to recognize his intellect. As to W, I have never regarded ignorance as a virtue particularly in a President. Being ignorant and dogmatic about opinions formed with little or no accurate information is even less of a virtue and dangerous when it a dominant personality trait in a President. So I did not think much of W. Obama is at least intelligent and receptive to learning.
The text of Obama's speech can be found at Transcript - Obama’s Remarks on the Economy - Text - NYTimes.com
In a speech today, Bernanke gave a good summary of what the Fed has done to respond to the meltdown in financial markets and the global economic recession. FRB: Speech--Bernanke, Four Questions about the Financial Crisis--April 14, 2009
Bernanke seems to believe that he can deal with the inflation problem when the economy starts to recover by draining excess liquidity and raising the federal funds rate.
I am starting to bump up against my currently static cash allocation. I wanted to buy another floater in my main account so I sold a non-dividend paying stock purchased earlier in the year and bought 100 GJS at $10.50. Again, feeling like one of those Masters of the Universe up in NYC, my purchase accounted for all of the volume for most of the day until someone bought 500 shares at a higher price. I mentioned that I wanted to substitute a Goldman Sachs floater with a maturity date for my GSPRA, another floater, with no maturity. While GJS is a floater, it is not the one that I wanted to buy but it will do for now. There are two others with minimum guarantees but they have risen over 10% in price the past few days as I was trying to decide which one to buy. I am not the kind of person who acts first and then thinks about it. But, then again, Right Brain always says that Left Brain thinks too much.
GJS is a Trust Certificate (TC) with the underlying security being a GS note maturing in 2033.
The links to the prospectuses relating to the underlying security, a GS 6.125% note due in 2033, are as follows:
This is a synthetic floater created out of a swap agreement. It has no minimum rate. It does have a maximum rate of 7.5% The float is .9% above the 3 month treasury bill which gives it an unattractive yield at the current level treasury bill level. Par value is $25. The maximum rate of 7.5% is hit when the T bill rate hits 6.6%. When that happens, my maximum rate would be 17.86% base on the $10.5 cost. Assuming GS survives to pay par value in 2033, which may be a significant assumption based on what happened to Lehman and Bear Stearns, there would be a profit of $1450 in 24 years or $60.42 per year amortized. This would generate an annualized yield of 5.75% once the TC matures and par value is paid by GS. My current yield is only 2.8% which is better than T Bills and money market funds with interest paid monthly.
In prior posts, I made a guess of what would be a reasonable average for the 3 month T Bill over a 24 year period and came up with 3.2%. At that rate, the yield on this security jumps to 9.76%. Of course, the actual average may be above 3.2% which would increase the average yield or below it which would have the opposite impact. But, in any event, since GJS floats at .9% above the 3 month T Bill, then my effective minimum yield at my cost would be 2.14% with the 3 month T Bill at 0%. So, in effect, it has a minimum.
A more realistic minimum yield would be what I am going to currently receive based on the extremely low T Bill rate now. With payment at maturity and an average coupon yield of 9.76% based on my cost and a realization of an average 3.2% T Bill yield over the next 24 years, the total annualized yield would be 15.51%.
A more realistic minimum yield would be what I am going to currently receive based on the extremely low T Bill rate now. With payment at maturity and an average coupon yield of 9.76% based on my cost and a realization of an average 3.2% T Bill yield over the next 24 years, the total annualized yield would be 15.51%.
The only reason that I buy a security like GJS is my concern about inflation and the large discount to par value which juices my yield a lot when the T Bill rises to 3 or 4%, or even higher as shown in the historical yields published by the Federal Reserve.
My yield will top out on GJS at a T Bill yield of 6.6% which was last seen according to the Fed's data on 1/4/1991. Yields significantly above that level were common in the 1980s. But, as I just said, I am hoping for a much more modest average yield of just 3.2% over the next quarter century.
This is a link to the GJS prospectus: www.sec.gov
While buying an individual bond is more risky than a bond fund when the inquiry is confined to credit default issues, it is also in my opinion potentially more rewarding. Also, when you consider that an individual bond can be held to maturity with the investor receiving par value, then that option reduces risk compared to a bond fund which has no maturity, always containing the inherent risk of loss of capital. I can achieve diversity with the amount of my capital so that is not an issue. I am satisfied with the diversity that I now have in terms of the number of issuers, the maturity dates and types of bonds.
With a fixed rate bond or even a floater with a minimum guarantee, I can figure out my minimum annualized return for the life of the security, year in and year out, for as long as the issuer survives to pay me, plus the additional return by holding a security to maturity purchased at a discount to par value.
For junior securities that have liberal deferral rights for the issuer, I have to be cognizant of that risk and the tax implications of a deferred payment. The floaters give me some upside to the fixed rate coupon issues, and I have attempted to calculate potential ranges of what I may receive over the pertinent duration period.
I can not do any of that with a stock. I do know that over long holding periods stocks carry more risk than recognized by many. Even under the best of conditions, a return of 10% per year over several up and down cycles may be the best that an investor can expect.
So over the past year, I have been buying bonds that will provide me with a greater return than that number. After all, I face the possibility of an implosion as an owner of common stock.
The bonds that I have bought are of course senior in priority to common stocks in the event of a bankruptcy, including the most risky bond like investments such as equity preferred securities.
For junior securities that have liberal deferral rights for the issuer, I have to be cognizant of that risk and the tax implications of a deferred payment. The floaters give me some upside to the fixed rate coupon issues, and I have attempted to calculate potential ranges of what I may receive over the pertinent duration period.
I can not do any of that with a stock. I do know that over long holding periods stocks carry more risk than recognized by many. Even under the best of conditions, a return of 10% per year over several up and down cycles may be the best that an investor can expect.
So over the past year, I have been buying bonds that will provide me with a greater return than that number. After all, I face the possibility of an implosion as an owner of common stock.
The bonds that I have bought are of course senior in priority to common stocks in the event of a bankruptcy, including the most risky bond like investments such as equity preferred securities.
At least I am finished with my tax return for another year. It is always about this time of year that I start to curse myself for the sheer volume of transactions made during the following year that have to find a place in my phone book sized return.
Ebay has finally recognized that there were few "synergies" afforded by Skype in its auction business. It plans to make a public offering of its stake sometime next year. Ebay took a 900 million dollar write-down on its Skype purchase in 2007.
Intel's earnings report was not awful and was okay given the recession.
Earnings were 11 cents a share, helped by a much lower than expected tax rate that chipped in a couple of cents. The results were better than the analyst consensus estimate of 3 cents. Intel is optimistic that the PC market bottomed in the first quarter and is returning to normal seasonal patterns. For me, that is all I want to know from them about the future. Others may want a security blanket by having Intel predict the future with more certainty. Linus van Pelt never grew up either.
Earnings were 11 cents a share, helped by a much lower than expected tax rate that chipped in a couple of cents. The results were better than the analyst consensus estimate of 3 cents. Intel is optimistic that the PC market bottomed in the first quarter and is returning to normal seasonal patterns. For me, that is all I want to know from them about the future. Others may want a security blanket by having Intel predict the future with more certainty. Linus van Pelt never grew up either.
Apparently there is more behind the surprise than just improved banking operations. I do remember that Wells took huge write-downs on Wachovia's assets and part of the earnings surprise was due to mark- ups in the just written down Wachovia assets.
DISCLAIMER:
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments NOT A RESEARCH SERVICE/Add of PWE Last Week These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.
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