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Subject:  Sunamerica’s 5.6’s of ‘97 Date:  9/24/2012  1:39 PM
Author:  trader2012 Number:  34409 of 35400

Since Bernanke’s Sept 13th announcement of QE Infinity, anyone who is already long just about anything has been making a bundle of money. Traders, salivating at the promise of endless, free money, are bidding up prices to historic highs. Bond-holders, even stodgy Buy-and-Hold bond-holders, are benefiting from the buying mania as well. Since Ben has made his announcement, my holdings --a 100% bond portfolio, spread across Agencies, Munis, Corporates, and Sovereigns-- have been being marked up by an average of $1,100 per market-day.

In the larger scheme of things, $1,100 per day isn’t big money. A union-scale, journeyman millwright pulling an around-the-clock shift, as occasionally happens in the final days of a plant shutdown for maintenance, can pocket that kind of money, and top lawyers make that much in an hour. But that kind of money does suggest, FOR NOW, that my portfolio is correctly positioned, just as it is also INCORRECTLY POSITIONED for what is to come next, namely, A FALL IN RISK-ASSET PRICES, once the common-sense reality sinks in that “you can’t get out of debt by going deeper into debt”, never mind Bernanke’s misunderstanding of what Keynes actually said. To that end, I decided to take Sir John Templeton’s advice to heart or, maybe, it was Ben Graham’s, namely, “Sell ‘em what they want to buy”.

A lot of years back, I picked up an odd-lot of Sunamerica’s 5.6’s of ’97 for a YTM of 6.4%. At the time, that was a decent yield, and the fact that maturity was so far in the future didn’t worry me. The current-yield would also be 6.4%, and I figured I could clip coupons and then pass the bonds onto my heirs. Subsequently, when I began worrying about the impact that inflation has on bond yields, I re-assessed my investment and saw that I had made a mistake. The 6.4% YTM was actually an average, yearly loss of (-4.0%), and that’s a mistake I needed to fix. Odd-lots, especially long-dated odd-lots, are unmarketable. No dealer is going to make a bid for them. So my first step, nearly a year ago, was to fill out the position to five. Fortunately, prices on the bond had fallen a bit. So my new average-cost for the position improved. My next step was to offer the bonds out, and I did so a couple of times without getting a reasonable bid. But now, with a bond-buying mania going on, I thought that, "Surely, I’d be able to get rid of them".

Well, I was right. In all, there were 12 passes, and the single bid was low-ball compared to the most recent sale. (But, also, that sale was $1M.) So, I accepted the bid and got out, roughly two points above my average-price, meaning, while I held the bonds I didn’t make much more on the investment than the coupon. But now, one more piece of trash is out of my portfolio, and I’ve got one less worry to deal with when prices roll over again, as they are going to do all too soon. So my advice to you is this: Thank Ben for creating the opportunity to sell now what you *should* rather than delaying too long and ending up having to sell what you *can*.

Charlie
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