An account rep from E*Trade cold-called me this afternoon (where I do keep $250k), asking if I wanted advice on how to put the cash from a called bond position to work (a OR hospital muni on which I made 14.2%). But nobody in this country but a professional fixed-income manager knows the bond market like I do, and certainly not an ‘account rep’ trolling a customers list. So I hit back hard. “Where did you get your degree? In what field? Can you support yourself trading for your own account?”

To her credit, she didn’t lose her temper, and she named a Mexican university, “International Relations”, and “‘No’, she couldn’t yet support herself from her investing alone”, pleading she was only 32. We talked some more, and that gave me the opening I needed to distinguish our skill sets. As a ‘top-down’ money-manager, she could probably do well for her clients, especially if she focused on Latin American opportunities. She spoke the language, was connected to the head of a construction company that had just complete a massive port development project, and Mexican stocks have beaten the crap of US stocks. “If I were you”, I said, “back away from making bond recommendations to anyone, because it’s not a market you know. Instead, build on what you do know and develop a niche for yourself within E*Trade as the Latin American expert.”

The more I thought about my advice as I did my customary afternoon walk, the better I liked the idea for my own. Gringos know absolutely nothing worth knowing about what happens south of the US border, which --ironically, as the Reconquista advances-- is moving steadily north each year. They don’t read the language. They don’t follow the news, even in summary form via The Economist or the BBC. But there’s a lot a very bright, well-educated people running the Central and South American countries and building business there. Also, typically, those countries are managing their deficits and debt problems a lot better than the US, Europe, Japan, or China. This isn’t to say that that the politics can’t get wild, that corruption isn’t rampant, that accounting standards are comparable, etc. But south of the US border is a lot more than just bullets and bandits, bananas and burritos.

In short, digging into the region’s companies and tracing out the inter-market relationships they have with the rest of the world sounded fun. Thanks to her cold call, I had stumbled onto the sort of diversifying project I had been looking for in 2013, something offbeat and exotic, but something that would demand a combo of fundamental analysis and technical trading skills that would cut across stocks, bonds, currencies, and commodities and could be done from either market side. And speaking of going short, track down the talk Kyle Bass gave a couple weeks ago in which he laid out his forecast for 2013. Grim stuff. The central bankers have painted themselves into a corner, and negative interest-rates cannot be excluded as they desperately try to prevent the credit world from blowing up. In either case, the bond bull still lives. But the game has gotten tougher and a lot more dangerous.

Carlitos

To All,

Please ignore the previous post as the deluded ravings of a lunatic. I’d love to break into a new market. But I’m running too much money in bonds to give a new investing adventure the attention it requires. How much is “too much”? Roughly 334 positions, spread across $765k face, offering a CY of 7.5% and a YTM of 10.4%. In other words, I‘m running a fixed-income portfolio that isn’t unusual in terms of size or composition. But it’s too much money to neglect or walk away from because I wanted a chance to play with stocks. In life --and in investing-- it’s a rare and fortunate person who can learn to do even one thing well. Me tying for two is just asking for trouble.

Bonds really are easy compared to anything else in the investing world. You run a scan, vet what you find, and then execute or back away, and you’re done for the day, and for as much as the next 30 years. That’s an easy gig, and the money --though not the best-- is decent enough on an absolute-returns basis, and certainly so on a risk-adjusted basis.

So I’m back in the bond game with both feet. As the year goes by, if I really, really can’t any place in the bond world to put idle cash to work, then I’ll look elsewhere. But there’s too much going on right now, and there’s still too many opportunities to be walking away from them. E.g., I got into Travelport’s 11.875’s of ’16 at 33. This morning, the LAST was 56. Something’s going on, and I’m likely to capture a good chunk of it whatever it is. That kind of money isn’t something one walks away from.

Charlie
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PS Do track down Kyle Bass’s recent talk. It’s an hour long, and in it he thoughtfully and methodically lays out just how screwed up the world’s economies are, specifically, how inflated the credit bubble has become and how horrific might be its unwinding. He called the housing bubble correctly and made billions shorting it. The smart money bet has to be that he isn’t wrong about the credit bubble, nor how to play it.

no worries. figured you are still pretty hooked on bonds. nice trade on travelport; just saw a 1000 block filled @ $53.

i just wanted to share a hit i got on my scan, now that i am really digging into the deeper end here of the risk pool. you probably already know this or might own it, so i will give you the cliff notes version:

Ameren's 2018 bonds trading at $78
CUSIP = 02360XAL1
yield = nearly 13%

in a nutshell, there has been a tangible split between AEE & Genco. basically genco can no longer get financial support from AEE; so Genco has to be completely and solely responsible now for all three AEE named debt floats; the 1st one redeeming in 2018; another one in 2022 (i think) and third in 2032. ((we kind of already knew this along time ago, but now its finally official))

both fitch and S&P have recovery ratings in the 2 range or 70-90%. fitch actually just put out a very detailed piece that you can see on reuters. i am not sure if i can post a link or not? given where the 2018's are trading right now, might be something to look at.

THANK YOU, altstrat91

On your tip, I'm now long their bonds, my first trade this year. But let me, in turn, lay out a bit of why I took a position.

Stock details:
- The current price is well above $5.
- A 2-year chart is favorable.
- The short-ratio is negligible.

Balance-sheet details:
- Accounts-payable are covered by net-receivables.
- Total-liabilities are covered by total-assets.
- Net-tangibles are not declining.

Bond details:
- The spread is tight.
- The chart isn't adverse. (Yeah, prices got whacked, but are trending back up.)
- The Moody's report wasn't overly worrisome.
- The recovery-ratio seems tolerable.

Again, thanks for calling this to my attention. I missed seeing it, because I hadn't been looking. (Shame on me for not doing my job.)

Charlie

sure thing Charlie. i picked up some more today as well. i have 15 total now which is just a little less than 1% of my total holdings. i have another one you might want to check out in case you do not own, but from what i recall you might not like this because its a privately held company. its also a mixed bag of sorts.

however for me on the plus side it works, because it has bonified tangible asset(s) coverage and a recovery rating of 2.

Black Elk Energy Offshore
CUSIP = 09203YAC5
trading $98ish or so
coupon = 13.75%

over the last 6 months i have been drastically tweaking my model and buying strategy; paying much more attention and focus to asset coverage and potential recovery scenarios. as you obviously know, given the current environment, it makes it even more challenging.

altstrat91,

Again, I want to thank you for the wake-up you offered in calling my attention to Amerenergy's bonds. If I show up for work, I can do a competent job in bonds, and I've got no business messing with anything else. No matter how sexy those other things seem, I'd have to work a lot harder, or, worse, I'd get killed, as do 90% of beginners in any field. There's very good reasons why I got out of stocks in '99, namely, I'm not good at them, and their rhythms and risks just don't make sense to me.

But me and bonds? Ah, now, there's a marriage made in heaven. From the getgo, nearly a 1,000 trades ago, I've consistently made decent money, and the bond market has been more than forgiving as she tried to teach me what I needed to learn. How can one abandon such a path merely for the sake of the new or because the debt markets have gotten tough?

"When the going gets tough, the tough get going."

The bond bull hasn't yet died, and there are still opportunities to be found. And now, having put on the position, logged it, and done its writeup, I'm done for the day and can head out and roll some bike miles in the winter crispness.

Charlie

RE: Black Elk Energy Offshore

altstrat91,

I'm done for today, as in, no more research, no more buying. The sun is shinning, and I want to roll my daily miles. But tomorrow, (err, make that 'Monday') I'll take a look.

But I will say this about risk-management. "Better a missed opportunity than a realized loss." and a lot of what cannot be forcasted from proper due-diligence can be made up for by judicious position-sizing, as in, betting small and betting widely, so that one's inevitable mistakes and misjudgments --or sheer stupidity and greed-- cause only tolerable damage.

I don't own any of Black Elk. But I'm making other bets in the energy sector, and I'll have to see if/how Black Elk would fit in.

Have a good weekend, Charlie