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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35365  
Subject: Re: Opportunity, or Value Trap? Date: 3/22/2012 12:32 PM
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I tried digging up Zions bonds on Etrade but only came up with two very overpriced issues. It's a pity because some of them look like good CD substitutes.

folgore,

Not a chance, not even close.

What is the essence of a CD? This single fact: principal and interest are guaranteed. Sometimes, a corporate issuer is of such impeccable financial strength that their promise to repay the loan is, de facto, as good as a guarantee. But that isn't the case with Zions. The fact they are having to beg for money says they're in trouble, to say nothing of the typical spec-grade ratings on their debt (and BBB- and below are spec-grade).

I like the bank (and own their debt). I like the brokerage firm (and do a lot of business with them.) But I was buying their bonds mid-70's (when they should have been bought), not now at today's prices. Heck, during the 2009 lows, I even picked up some of their 6's of '15 at 55.

It's buying at those kind of prices that creates Graham's "margin of safety" and why bond-investing is best understood (and practiced) as a value discipline, not as a cash-management gig. This is exactly where Loki (and his camp followers) screwed up and why his advice to them was/is so bad. He failed to understand the difference in purpose of the two and led them (and himself) right into the poverty of negative returns they now find themselves. Loser, losers, losers all of them, and Bernanke (and his ZIRP) isn't the one who did it to them. It was their own greed, timidity, and stupidity.

Cash (and cash-equivalents) are held (only in judicious amounts) for liquidity. Bonds (and other investments) are held for the income-stream and/or cap gains they might offer. The upside of cash (and cash-equivalents) is that it has no nominal downside. The downside of cash (and true equivalents) is that it is is nearly always a sure way to lose money (after taxes and inflation). The downside of any true investment is the true possibility of nominal loss. But its upside, if purchased properly, is true gains (after taxes and inflation). The delusion that Loki (and his camp followers) suffers under is a belief that "riskless" assets can offer real rates of return. Yes, occasionally and anomalously, such a thing does happen. But when the historical record is examined, it can be seen just how rare those times have been. So that's a third criticism that can be leveled against them. They are ignorant of market history.

Bottom line? CD substitutes can be found, but Zion's bonds aren't some of them.

Charlie
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