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Author: globalist2013 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35396  
Subject: Ford’s Bonds: Elephant or Rabbit? Date: 12/24/2012 11:05 AM
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From time to time, just for practice, I’ll run a scan on a single issuer’s debt. Ford’s bonds looked interesting this morning. So I dumped their offering-list into Excel and did some reformatting. This is the result.

Cpn Due YTM
6.520 03/10/13 0.1%
3.000 06/20/13 0.7%
3.000 07/20/13 0.7%
2.050 09/20/13 1.0%
7.000 10/01/13 1.0%
2.050 10/20/13 0.7%
2.750 11/20/13 0.8%
3.000 12/20/13 1.1%
3.250 12/20/13 1.2%
1.500 12/20/13 0.6%
2.500 02/20/14 0.9%
2.750 03/20/14 1.0%
2.750 03/20/14 1.0%
3.250 05/20/14 1.4%
8.000 06/01/14 1.2%
3.250 06/20/14 1.1%
1.750 08/20/14 0.7%
1.750 09/20/14 1.1%
8.700 10/01/14 1.4%
3.875 01/15/15 1.6%
3.500 03/20/15 0.0%
7.000 04/15/15 1.6%
3.500 04/20/15 1.1%
12.000 05/15/15 1.8%
2.750 05/15/15 1.6%
5.625 09/15/15 1.8%
7.350 09/15/15 2.2%
2.500 01/15/16 1.8%
4.207 04/15/16 2.0%
8.000 12/15/16 2.3%
4.250 02/03/17 2.3%
3.875 02/20/17 0.2%
3.000 06/12/17 2.3%
6.625 08/15/17 2.5%
3.000 08/20/17 3.0%
3.000 08/20/17 2.0%
5.000 05/15/18 2.8%
6.500 08/01/18 3.3%
4.000 02/20/19 1.5%
3.625 05/20/19 2.5%
8.125 01/15/20 3.6%
9.375 03/01/20 4.5%
5.750 02/01/21 3.5%
5.875 08/02/21 3.5%
9.215 09/15/21 4.9%
5.000 11/20/21 1.2%
8.875 01/15/22 4.9%
4.250 09/20/22 3.6%
3.750 11/20/22 3.8%
3.750 11/20/22 3.4%
3.750 12/20/22 3.8%
3.500 12/20/22 3.6%
7.125 11/15/25 5.2%
7.500 08/01/26 5.5%
6.625 02/15/28 5.6%
6.625 10/01/28 5.2%
6.375 02/01/29 5.3%
9.300 03/01/30 5.9%
7.450 07/16/31 5.1%
8.900 01/15/32 6.3%
7.750 06/15/43 6.5%
7.400 11/01/46 5.9%
9.980 02/15/47 6.8%
7.700 05/15/97 6.7%

As you can see, with the tiny exception of the 7.7’s of ’97, their yield-curve is normal, and the 9.98’s of ’47 with their YTM of 6.8% --assuming a commish of a buck per bond-- might even be attractive. However, the next step in running a bond scan (which is to estimate the impact taxes and inflation will have on yields) will quickly dispel that notion. No matter how far out the yield-curve one goes, not a single bond offers a positive return.
  
Cpn Due Adj_YTM
6.520 03/10/13 -9.0%
3.000 06/20/13 -6.0%
3.000 07/20/13 -5.7%
2.050 09/20/13 -5.2%
7.000 10/01/13 -5.5%
2.050 10/20/13 -5.3%
2.750 11/20/13 -5.2%
3.000 12/20/13 -4.9%
3.250 12/20/13 -4.8%
1.500 12/20/13 -5.2%
2.500 02/20/14 -4.9%
2.750 03/20/14 -4.9%
2.750 03/20/14 -4.9%
3.250 05/20/14 -4.4%
8.000 06/01/14 -5.0%
3.250 06/20/14 -4.7%
1.750 08/20/14 -4.8%
1.750 09/20/14 -4.5%
8.700 10/01/14 -4.7%
3.875 01/15/15 -4.2%
3.500 03/20/15 -2.9%
7.000 04/15/15 -4.3%
3.500 04/20/15 -2.8%
12.000 05/15/15 -4.5%
2.750 05/15/15 -4.0%
5.625 09/15/15 -4.1%
7.350 09/15/15 -3.9%
2.500 01/15/16 -3.8%
4.207 04/15/16 -3.8%
8.000 12/15/16 -3.7%
4.250 02/03/17 -3.4%
3.875 02/20/17 -2.3%
3.000 06/12/17 -3.3%
6.625 08/15/17 -3.4%
3.000 08/20/17 -2.8%
3.000 08/20/17 -2.9%
5.000 05/15/18 -3.1%
6.500 08/01/18 -2.7%
4.000 02/20/19 -2.0%
3.625 05/20/19 -2.3%
8.125 01/15/20 -2.6%
9.375 03/01/20 -1.9%
5.750 02/01/21 -2.5%
5.875 08/02/21 -2.5%
9.215 09/15/21 -1.6%
5.000 11/20/21 -1.4%
8.875 01/15/22 -1.5%
4.250 09/20/22 -2.3%
3.750 11/20/22 -2.1%
3.750 11/20/22 -2.2%
3.750 12/20/22 -2.1%
3.500 12/20/22 -2.2%
7.125 11/15/25 -1.2%
7.500 08/01/26 -1.0%
6.625 02/15/28 -0.9%
6.625 10/01/28 -1.2%
6.375 02/01/29 -1.1%
9.300 03/01/30 -0.8%
7.450 07/16/31 -1.3%
8.900 01/15/32 -0.5%
7.750 06/15/43 -0.5%
7.400 11/01/46 -0.9%
9.980 02/15/47 -0.4%
7.700 05/15/97 -1.2%

OK. Let’s step back and consider what’s going on.

By definition,’fixed-income investors’ want ‘income’. But taxes have to be paid on that income, and inflation degrades its purchasing-power even further. The current tax-rate on ordinary-income is around 25%, and a realistic rate of inflation is around 5%. Also, because most of those bonds are priced at a premium, a capital-loss will result that can be converted into a tax-credit at cap-gains rates. But when the appropriate formulas are written and applied to Ford’s bonds, it will be seen that not a one of them offers a positive return. Instead, to buy their bonds is to choose to lose one’s purchasing-power.

That’s a choice one can make. In fact, it’s a choice that the Federal Reserve’s Zero Interest Rate Policy (ZIRP) is forcing investors to make. The Fed wants investors to spend. So they are making ‘saving’ unattractive, not that buying triple-BBB bonds is even a remote approximation of ‘saving’. But it is “parking money”, and the Fed doesn’t want money “parked”. It wants it spent, with the gov’t being the first in the spending line and, hence, the chief beneficiary of monetary expansion.

Bond investing is a betting game. You’re either making bets on the level/direction of interest-rates, or you’re betting on the level/direction of an issuer’s credit worthiness. For a long time now --and for a long time into the future --making interest-rate bets as an investor has been a dead-end gig unless you’re the sort of person who likes to exchange elephants for rabbits. (In other words, if you're willing to annutize your present wealth for a diminishing income-stream). But credit-worthiness bets are still viable, even though bets on Ford's debt isn’t one of them.

OTOH, if you had done your buying when it should have been done, and you picked up some of Ford’s 9.375’s of ’20 at 85 as I did (and not at its present price of 127), or some of Ford’s 7.75’s of ’43 at 75 as I did (and not at its present price of 118), or some of Ford’s 7.4’s of ’46 at 62 as I did (and not at its present price of 123), then you can congratulate yourself. You could flip the bonds you now own for some fat cap-gains, or you could continue to hold them and enjoy both a fat income-stream, as well as the likely assurance that when your principal is returned to you, your losses from inflation will be minimal. In other words, if you are exchanging $620 of 2009 dollars for $1,000 of 2046 dollars, will you come out ahead, behind, or break even? But if you are exchanging $1,270 of 2012 dollars for $1,000 of 2046 dollars, there can be no question that you aren't trading elephants for rabbits.

Timing. It’s all a matter of timing. You’ve gotta buy when the price is right. At present, for nearly everything in the bond market, the price isn’t right. There are still some elephants to be found in the bond market jungle by those willing and able to hunt for them. But Ford’s debt has become a rabbit, offering not much of a meal or trophy.

Charlie
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