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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 35351  
Subject: Re: New offerings? Date: 2/8/2013 10:13 AM
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Given the current environment, is it better to get in on a new bond offering at the ground level -- i.e., par -- or is it better to let the market have a go at the new issues possibly creating some bargains with higher yields but also at the risk of seeing the price of a new bond get jacked up way above par?

Folgore,

That's a wonderful question: clear, concise, and relevant. But let's make it an even better question by throwing out the qualifier of "in the current environment", which adds nothing.

Get in at the IPO price, or let the bond "season" a bit?

If a new-issue can be bought without commish, as is the case through Zions Direct's auction process, or if a new-issue can be bought at a discount to par (again, as can be the case through ZD's auction process), *and* if doing the buy would result in a better price than could be obtained in the secondary market for a bond from the same issuer of comparable maturity, *and* if the bond offers a better yield than anything available from other issuers of comparable risk, then doing the IPO becomes a a no-brainer, and I've executed on situations like that before.

But that's a lot of conditionals, right? and it's helpful to review just how bonds come to market. Somebody wants to borrow money. So they use a middleman to price an offering. The middleman estimates the market for the issuer's debt and sets the coupon (and sometimes a discount or premium to it, depending on pre-issue interest from subscribers) at a price that builds in his commission (generally set around 2%). Therefore, one of three things could happen. The underwriter could have guessed the market correctly, and the bond comes to market at par and continues to trade at par during the three-month "support period", and then begins to trade at a discount that reflects the underwriters fees. Or the underwriter guesses wrong and the bond crashes immediately, or it jumps to a premium immediately.

In other words, gaming new-issue bonds is no different than gaming new-issue stocks or new-issue closed-end mutual funds. The overwhelming evidence (from study after study) says that IPOs are a sucker's bet. Let the stock, bond, or CEF "season", and then make your move. For sure, when an IPO takes off like a rocket, you feel like a fool for not having jumped in, and you suffer huge waves of envy and regret, beating yourself up with "would/coulda/shoulda". But that's bullsh*t. Investing is a process of making high probability bets. Yeah, occasionally, you can get away with taking a chance on a flyer. But you'll go bust over the long haul if that's your chief engine for profits *unless* you've made betting on IPOs an specialization in which you truly understand the whole process and you know why the underwriters and market makers might have made a mistake that you can exploit.

My guess is that you're looking at the IPOs for Prospect Capital, and you're wondering whether to do the trade. The answer is simple. Do your Due-Diligence. If in light of your total financial plan, buying some of the IPO makes sense, then do the trade. Otherwise, back away without regret.

Charlie
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