Monday, June 29, 2009

BOUGHT 100 IGE/Forbes Makes Case for Bonds Over Stocks/PFK Retrospective/S & P Economist: No Inflation Threat for Five Years at Least

1.  S & P Economist-No Worries About Inflation:  In an article in USA Today, David Wyss, chief economist for Standard & Poor's, was quoted as saying that a lot of worries about inflation "are examples of financial illiteracy". He also said that the U.S. will not have inflation for "at least five years" when he expects the economy to "get back"  USATODAY  I readily admit to being an illiterate when it comes to reading economic textbooks, having never read a single one. But I thought that I would make a note of this prediction by an esteemed economist who has apparently read a lot of them.  I flipped my magic coin to see whether Wyss's prediction will come true, and the coin said no.  I hope that Wyss is right, because I do not want to even hear the number for the U.S. debt service cost when rates start to move up significantly.  In fiscal year 2008, 412 billion was spent on interest payments.  Given the abnormally low treasury rates, the interest paid in fiscal 2009 through May 2009 was 214 billion.
Government - Interest Expense on the Debt Outstanding 

 The total public debt outstanding as of 6/25/2009 was $11,363,514,364,365.21. 

Given the parabolic upward trajectory of the debt, you would not want to have to finance it at an average annualized rate of say 7%.   

2. Prudential CPI Floater (PFK):  My recent buys of the senior bond issued by Prudential maturing in 2018 that pays monthly interest is an example of being too timid when a much better opportunity was presented to buy this security.  I noted several discussions in my blog about PFK from the 4th quarter of 2008.   First, I noted that I passed up buying PFK at $12.5 during one of the darker periods last Fall when I just had a deer in the headlights look (Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM).  After missing it at $12.5, I was not about to buy it at $16 a few weeks later, and my post from December shows a form of buyer's remorse. CPI FLoaters PFK AND OSM/ Warnings by Chip Companies/FDX  And having passed it up at $12.5 and $16, I end up buying it in the 18 to 19 range.  To the extent that I have  reasonable excuses, they  revolve around the sheer magnitude of events from last Fall which caused me to question the survival of many of our largest financial institutions.  So, my buying of senior bonds was primarily limited to senior bonds from non-financial investment grade companies.  I did buy at even a greater discount to par value a long term senior bond issue from Pru in Trust Certificate form-JZH, buying at below $10 for a $25 par value bond.  TRUST CERTIFICATE JZH: PRUDENTIAL SENIOR BOND I also had to consider that I had acquired by December 2008 250 shares of JZH, and I also owned some short term bonds from Pru.

So, I was concerned about my total exposure.  Still, it was a mistake not buying 100 PFK at 1/2 of par value.  I do not view it as a mistake based on the fact that PFK rose from $12.5 to almost $19 before I did buy it, but that I did not analyse the financial condition of Prudential appropriately last Fall.   I was listening more to the market noise than to my own brain and judgment.  

3. Forbes Makes Case for Investment Grade Corporate Bonds Over Stocks: I received my issue of Forbes today. The lead article in its Money & Investments section, written by Bernard Condon, attempts to make the case for buying investment grade corporate bonds over stocks. Forbes.com In dynamic asset allocation, it is important to know when an opportunity arises, which means the investor can not be focus exclusively on just one asset class. There is a chart in this story which shows the historical spread of investment grade corporates over comparable treasuries since 1989.  In the Fall of 2008, the spread hit 6%, which was unprecedented. At the FINRA site, which contains charts on individual bonds, you can look at  virtually any investment grade issue and see a parabolic move down in price during October 2008.  This was the opportunity.  The author notes that the average spread is 1.2% over the period shown in the chart, which does not include the late 1960s and early 1970s when inflation was a serious problem for all longer dated bonds. The spread is now around 3.1% according to Barclays Capital.  But, that is due in no small part to the low yields of the treasuries.  The assumption being made by the author is that the future will look like the immediate past.  The key assumption is a continuation of low rates of inflation which would be beneficial to the bonds in general.   If that assumption is wrong, then neither the treasury or the comparable maturity corporate long bonds will prosper. 

The case against stocks hinges on their current earnings and forecasting that as the norm going forward. The author relies on investors, who are rarely enthusiastic about much of anything, to support an argument for an anemic growth scenario for years to come, quoting Jeremy Grantham's prediction for seven lean years.  The author also relies on David Rosenberg who advised investors to load up the boat on 10 year treasuries yielding 2.65% back in early April, and to avoid stocks back then (Item # 2: Afternoon Comments after Digesting the Saturday Papers/ How reasonable is a prediction of a 2% 10 year treasury yield and 475 on the S & P 500)  So the key for the author's recommendation is anemic, low inflation growth continuing for more than the next few months, but for the next 7 to 10 years. If that is the most reasonable prediction, then my bond investments will continue to outperform.  I am inclined to keep the fixed rate long corporate bonds until I see the whites of inflation's eyes.  I am not inclined to accept, however, forecasts from perennial pessimists.

There is an ETF for investment grade corporate bonds that I no longer own, having bought  and sold it twice recently, LQD. The web site for the sponsor shows a 30 SEC yield of 5.82% as of last Friday with a weighted average duration of 12.27 years and 104 holdings. iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD): Overview


4. Dividends and Interest: I did notice that JZH, the TC with the long term Prudential bond, will go ex interest for its semi annual interest payment on 7/10. AT & T declared its regular quarterly dividend which will go ex on 7/8.  At Friday's closing price, the dividend yield is 6.61%. I also own 200 of a junk rated senior bond issue in TC form issued by John Malone's company, Liberty Media, PKK, which goes ex interest  on 7/10. Sysco goes ex dividend tomorrow with its regular quarterly dividend.  I picked that one up in March at the $19.46 which would produce about a 5% yield at the current dividend level. Buys of CPB LQD SYY XKK/Regressive Taxation-Cap & Trade/Two closed end funds that pay good quarterly dividends that I own, IAE and IRR, also go ex dividend tomorrow.  This information can be found daily at the Dividend Page at the WSJ. Dividends - Markets Data Center - WSJ.com  

5.  Bought 100 IGE:  This is an Ishares sponsored ETF for North American natural resource stocks that I mentioned in a post from last night.  I bought 100 at $27.85.  Before buying an ETF, I will always check the NAV at the sponsor's web page. iShares S&P North American Natural Resources Sector Index Fund (IGE): Overview  The NAV last Friday was shown as $27.66.  Many of the natural resource stocks are up today, so I would anticipate that my purchase was reasonably close to the current NAV value.  The expense ratio is .48%. This ETF currently has 127 securities in it and the list is provided at the sponsor's web site:  iShares S&P North American Natural Resources Sector Index Fund (IGE): Holdings

I will now have to find something to sell under my trading rules in effect. I can subtract the cash flow about to be received on 6/30 and 7/1 from the cost of the IGE purchase. I will not make that decision until later.  One option would be sell Conoco.


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 readers of these posts 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.   Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.  Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it. 

No comments:

Post a Comment