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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Price-Risk versus Information-Risk Date: 3/24/2009 10:36 PM
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Charlie,

For a quarterly number cruncher I had as much data as I was going to get. In order for me to make a serious play on GE I would have liked to have my run through the numbers done as the markets anxieties grew. Waiting for a price point.

For me today's price or last weeks pre-downgrade price is a question of profit and margin of safety. If I had my numbers crunched moving at the moment of greatest anxiety the 10% or whatever I can get is my best move.

For me today's price 8.2%ish ('38's,'39's) has removed a good chunk of my margin of safety.

Back o napkining a handful of similar maturities within the same rating spectrum and I get an average of 7.07%.

GE is priced over 100 basis compared to its peers
One of two possibilities are probable:
1) GE should be rated lower and is priced by the market accordingly
2)The market is overreacting to GE's current situation.


7.07% implies a AA+ - Aa2 premium over risk free of 3.44%. Seriously AA+ is over 3% riskier than risk free? Is my math wrong or my sample bad?

If we take some really rough numbers and stack them. Historical inflation 3.5%, historical GDP 3.5% = 7% now if we take this number and subtract it from the rolling 20year average of the stock market we get 10.5 - 7 = 3.5% a historical average of stock market equity risk premium.

Are 30 year AA class bonds actually as risky as the stock market? The same risk premium is implied but we lose 3% for supposed principal return. Odd, if AA's are as risky as the stock market then principal is at risk, isn't it?

Or can we capture 3%, the historical stock market risk premium, in a much safer vehicle the AA rated bond? A vehicle if held to maturity has much less volatility than the stock market.

Is the bond market running scared? Is it running scared enough?

jack
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