No. of Recommendations: 1

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?

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.