1. GM Bankruptcy: I would hope the market did not tank this afternoon based on the realization that GM had run out of options with a bankruptcy filing as the only remaining alternative. The secured lenders to GM would apparently receive 100% of the their claims under the bankruptcy plan being finalized by the government, who is really in charge now. NYTimes.com WSJ.com The unsecured senior creditors were offered 250 shares for each $1,000 in bonds. This is another good lesson on how well even senior unsecured debt holders will fare in a collapse.
2. Moody's Comments on U.S. Debt Rating: I thought the comments of Moody's about the U.S. debt rating may have spooked some investors. While Moody's said the rating was stable it went on to comment about the number of events that could lead to a reassessment, such as funding for medicare and social security, the economy and the government's burgeoning debt ratios. Those issues are hardly a national security secret either. I discussed the problems with funding Medicare and Social Security just a couple of days ago. Some Political Type Observations from the Newly Appointed Leader of the Ornery Party Which Can be Ignored by the Stock Jocks I did notice a spike down in treasury prices after than announcement, and TBT started to move up nicely from around $54.81 to $56.6 in about thirty minutes. This occurred even though reports maintained that the five year treasury auction was well bid today. Article - WSJ.com As I have said many times, it is hard to envision a set of circumstances, based on reasonable forecasts about the future, where the ten year note falls in yield and gains in price. I do not own it for that very reason. The 35 billion dollar 5 year auction was just part of the 101 billion dollars that the government plans to sell this week. Wow! Any takers out there?
3. Home sales rise by 2.9%: While sales increased, the median price fell to $170,000 from $201,300 a year ago. More importantly, the number of unsold homes in inventory rose 9%. So, this goes on the negative side of the ledger.
4. Bank of America Conversion of 5.9 billion of preferred into common shares: BAC continued its effort to raise equity capital by agreeing to convert 5.9 billion of preferred stock into common. This would be preferred stock owned by private parties, and not the government's preferred shares. The preferred shares being converted would be exchanged for around 436 million common shares. BAC now has no plans to convert the government's preferred and hopes to pay the government back later this year according to some reports that I read today. All of these recent capital raises by BAC is positive for preferred shareholders since BAC now has less reason to eliminate the equity preferred dividends or to defer the Trust preferred dividends as a means to raise capital.
5. J P MORGAN: JPM issued a warning on credit card losses, saying the losses this quarter would be near 9%. Dimon said the losses over the next several quarters could reach 1.4 billion in home equity loans, 500 million in prime mortgages, and 375 to 475 million in subprime mortgages. Morgan sees about a 500 million dollar cost to implement the new credit card law just passed by Congress. I do not own the common but do have a few positions in JPM's junior debt through ownership of Trust Certificates.
6. Is The Bond Asset Class About to Fail?: I would answer that question by simply saying it is in danger of failing, maybe I would now say more probable than not of failing. But, I am just an individual investor trying to make my own way with no training in economics, so what do I know? The potential for failure is partly due to the current low yields afforded by treasuries and bond ETFs such as BND, a Vanguard ETF for the Total Bond Market resulting from a long term secular bull market in bonds. The seeds of a decline are always sown after a long period of enthusiasm for an asset class. The other main reasons that the bond class may fail is due to the extreme amount of borrowing that most be done by the U.S. to plug its gigantic budget deficit, and the perceived problem of inflation down the road caused by the extreme amount of fiscal and monetary stimulus. This subject has been a frequent topic of discussion in this blog, along with my efforts to prepare for what I view as a more probable than not scenario unfolding. I do believe strongly that a 3 or 4% yield for a debt security or bond ETF with a 7 to 10 year duration is insufficient to compensate me for the various risks which I believe to exist.
Many bond mutual funds have already failed by having strong positive correlation with stocks in 2008. When the 30 year treasury recently hit a 50 year high, I did not think that I was making an outlandish prediction that it was due for a fall. STRYKER/Parabolic moves in an asset class: role of dynamic asset allocation theory
I try not to dwell too long trying to justify the U.S. treasury hitting a fifty year high earlier this year. Let someone else do it, and look silly doing it at least to me.
My approach to deal with these concerns expressed throughout this blog has not been to dump bonds, but to dump certain bond ETFs like BND and to avoid treasuries other than the TIP. I have been in a trading mode on LQD and no longer own it. Instead of plain vanilla Bond ETFs for U.S. corporate and treasury bonds, I HAVE INCREASED MY EXPOSURE TO BONDS STARTING IN SEPTEMBER 2008, with many of the large number of purchases discussed in this blog on the day that I made the purchase. This increase in exposure was in what some individuals would call exotic bond or bond like positions, including such instruments as Trust Certificates, floating rate equity preferred, and synthetic floaters, along with a few Trust Preferred issues and a few fixed coupon equity preferred securities bought on an opportunistic basis. When someone reads the past several thousand pages of this blog, someone with a lot of time on their hands no doubt, you would think that I was some kind of bond investor. No. I am a Stock Jock and have been one for decades. I was buying bonds and bond like investments last year to fill my asset allocation for bonds on terms more favorable to me than what I was receiving from bond ETFs and from a pathetic bond fund bond, which I finished jettisoning today.
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