1. Prudential (own bonds only): I read a report from FBR Capital Markets that Prudential was "clearly" the strongest life insurer in FBR's credit analysis. FBR raised its target on Prudential to $60 from $46, and upgraded its recommendation to outperform from market perform. I may add to my position in the Prudential floater tied to CPI, and then sell my higher cost shares when and if the shares rally back to 19 to 20, keeping the lower cost shares. Barrons.com
2. European Commission: Sitting at a desk in Tennessee, it is difficult, practically impossible, to know how much power the European Commission has to dictate terms to banks regulated by their host central banks and governments. I did read a story today that at least two banking institutions have agreed to defer paying interest on their subordinated debt after receiving requests from the EC. Reuters I am barely familiar with Allied Irish, having read a few stories over the past nine months that indicated to me that they were in bad shape. Those institutions are Allied Irish Bank and Belgium's KBC. The Reuters' story quotes an Elizabeth Afseth of Evolution Securities, who notes correctly in my opinion that the EC pressure will hurt the banks in their efforts to raise capital from private investors. She also made the point that it would be interesting to see how two U.K. bank, RBS and Lloyds, with less state ownership, react to pressure which suggests to me that the EC may not be all powerful in these matters. I would also note that Allied Irish Banks deferred the interest payments, and offered to buy the bonds back at a huge discount to par value. That does make one wonder what is really going on. In the last analysis, you do not want any government making decisions on when a solvent firm can honor its debt obligations. Once you start down that road, in a European version of Hugo Chavez, then investors need to keep that in mind from now on.
The EC policies do lend themselves to acts of bad faith by both the EC and the financial institutions. As a result, I would further agree with Ms. Afseth that bond investors have to view the European financial institutions as far greater risks in the future, due to being subject to EC pressure to avoid paying their obligations when they are capable of doing so.
I would hope that the financial institutions that are not in dire distress will resist the pressure of the EC, and would be supported in that effort by their host governments and central banks. If ING or Aegon succumb to that pressure now, when the economic recovery is underway, then I will probably have to assume that they wanted to succumb to that pressure and to avoid making timely payment on their debt.
3. Bond Mutual Funds vs. Bond ETFs: There was a study summarized in the WSJ.com that showed that 92% of the long term investment grade bond funds lagged behind their benchmarks for the past five years. The WSJ noted that the study had 98% of the funds investing in mortgage backed securities lagging their index over the same period. I am no longer going to invest in bond mutual funds after my experience with Loomis Sayles last year. I would suggest that anyone investing in bond mutual funds at least check the performance of the fund against the benchmark which can be done easily at MSN money. Just type in the symbol, go to "returns" and take a look. This is the return page for the Loomis Sayles retail bond fund, LSBRX: LSBRX - Fund returns - MSN Money 2008 was kind of a benchmark year for me. I have bonds in my portfolio for a reason, to add diversification and hopefully negative correlation to stocks in a bear market. I do not want to keep a bond fund that has a positive correlation with stocks during one of the worst years for stocks and just adding to my problems. Compare the returns of LSBRX with the dumb index ETF BND for 2008, and you will see what I mean: BND - ETF returns - MSN Money
I do invest in bond ETFs, and I currently own TIP, BWX and WIP. Bond ETFs: Links in One Post I have sold the other bond ETFs and used the proceeds to buy individual bonds or bond like investments such as equity preferred stocks. For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible I can achieve diversification in my bond portfolio, and I am comfortable with the credit risk of owning individual bonds. I manage the credit risk partly by limiting by total exposure to one company at less than 10 grand, and that includes its bonds, common stock and preferred stock.
One main advantage to owning individual bonds is that I can buy them at discounts to par value, and hopefully capture the discount to par at maturity, assuming the firm is still solvent to pay me. A bond fund has no maturity. A mutual fund or bond ETF does not promise to pay you a principal amount at maturity. FINRA - Investor Information - Smart Bond Investing That is a key difference for me since I have the funds to achieve the diversification of a bond fund. And, I would add that I outperformed the bond fund managers in my first full year as a Bond Stud which was 2008, shortly after I started listening to Frank Sinatra music. It is official, I am now a Bond Lover. Just not a European bank bond lover.
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