Like Dan, I didn't receive a "Reservation Offer" to roll my 3-year CD at a better rate than ordinary people, whereas Wendy (and I'm sure others in this forum) did receive the offer. So I called PenFed just now to ask why. The rep looked up my account and then said the following: "You have just one CD coming due. We've already been able to fill our needs." What she didn't say, but what I have to assume, is this. First, they made the offer to the "whales", those with big accounts. If their funding needs had not been met, then they would have extended the offer to the "minnows". Their games; their rules.
It never occurred to me, since DH and I got identical letters. But, yes, we are whales. Between DH, myself, our IRAs, and 2 trusts, all at Pentagon...they probably would have noticed the loss.Wendy
I should mention that I took the 3 year on some and the 5 year on others. Along with my TIPS, this covers me for both the inflation and deflation scenarios.Wendy
The 4-year looked to me to be the "sweet spot". But splitting it between the 3-year and 5-year was certainly defensible, too. So the matter is now settled, and tomorrow's a new market, with who knows what surprises.
The rate "special" didn't have a 4 year. It was either 3 year (3.5%) or 5 year (4.0%).Wendy
In your initial post, you quoted a 4-year rate.Term Special APY Regular rate APY U.S. Treasury3 3.50% 2.50% 1.11%4 4.00% 2.75%5 4.25% 3% 2.02%
Term Special APY Regular rate APY U.S. Treasury3 3.50% 2.50% 1.11%4 4.00% 2.75%5 4.25% 3% 2.02%
I guess we'r' not whales either despite what I consider a large amount in Ped Fed. Ah well, we just added a new 7 year CD and will be rolling over another in January & February, probably both going out another 7 years, especially if the rate is still 4%
Bobcatkitty,If I understood her correctly, the rep I talked to at PenFed said that currently-offered rates would be raised in January by 1.25%. She didn't say which rates that would apply to, nor did I pursue it. But it would seem that the minnows might be able to swim with the whales after all, if they choose to.
Sorry, my original post was wrong. I must have misread the card PenFed sent. It actually said.Term Special APY Regular rate APY U.S. Treasury3 3.50% 2.50% 1.11%5 4.00% 2.75%7 4.25% 3% 2.02%Strange how perception works. I asked the PenFed customer service rep for the 4 year and he said, "We don't have a 4 year." Then I looked again at the card in my hand, and, sure enough, it didn't have a 4 year.That kind of perceptual mistake is why I required a second set of eyes to do quality control in manufacturing. People do not make mistakes deliberately. I have seen this before -- a person looks right at a mistake they made but they don't see it. A second person will see it right away.Wendy
In the past Junkman, January has been their "fire sale" rates. The 2 we having rolling over has a 6.25% rate and a 5.5% for Febr.But alas, i GUESS $250k in there now doesn't qualify as a whale.
$250k? That's a big chunk of change to be dumping into CDs at just one institution, especially at the rates PenFed is offering. I can't believe that some shopping around couldn't find you a better deal even if you restrict the shopping to principal-protected instruments.Congrats on having those kinds of resources to work with. But you really do need to sit down with an Excel spreadsheet and figure out just what your inflation-adjusted results really are. If that $250k is just 20% or so of a total portfolio, then not a problem. Gains elsewhere will make up the losses of purchasing power. But if you're betting the bulk of your assets on CDs, you might consider a bit of diversification into other asset classes.
Bob,Everyone’s situation is different. So what I’m about to say can and should be ignored if it doesn’t interest/apply to you. But if I were you, I’d take a portion of the $250k and shop the corporate bond market. If you’re willing to buy CDs, then it has to be inferred that current-yield is more important to you than eventual cap-gains. Here’s a bond situation you might want to consider. Currently, there are 4 (1/1) of Ford Motors’ 7.7’s of ’97 being offered at 74.500 for a YTM of 10.335%. At that price and that yield, this is definitely a risky bond, fully deserving its junk-bond rating of Caa1/CCC. Off the top of my head, if I’m remembering right, the 5-year default rate for triple-CCCs is in the neighborhood of 13%. That’s not a minor risk. But let’s degrade that rate even further by bumping it up one Fib notch to a default rate of 21%. Let’s also ignore the YTM, which you won’t be around to collect on, and focus on current-yield, which is an attractive 10.441%. (Had the bond been bought when it really should have earlier in the year, the CY and TM would have been a multiple of that. But that’s neither here nor there, because yesterday’s markets can’t be bought.) To buy ultra, long-dated bonds is to annuitize your money. You put up the purchase price and, hopefully, buy an income-stream for the life of the bond, at which time your principal is returned. Due to the ravages of inflation, the principal won’t be worth much, but the fact of buying at a steep discount helps to take some of the string out of that loss. Meanwhile, from the getgo, you’re receiving a fat income-stream whose effective purchasing power will gradually decline/increase in direct proportion to inflation/deflation. The fly in the ointment is that income-stream isn’t guaranteed in any way. In fact, it will cease if the issuer defaults. So the game becomes that of gaming the issuer. If the day after the bond is bought, the issuer defaults, then recovery of capital-at-risk will depend on the workout-price offered to note-holders. In Ford’s case, the assumption has to be that the workout won’t be insignificant, and that it most likely will be a debt-for-equity swap. So, if Ford files Chapter 11 on you, you end up owning some expensive shares of their common. Big whoop. I can think of worse fates. If Ford delays filing Ch 11, how long will it be before you’ve recovered your capital? Just under eight years, right? All coupons received after that are gravy, making the bond the better purchase than a CD in X number more years. (I’m too lazy to do the math, but plotting it out in Excel is straight-forward.) If Ford never files, then you’ve got a killer income-stream. But let’s guess that Ford files in accordance with historical default-rates. How many of these a manifestly risky situations offering a 10% CY would have to fail on you before buying the safe, but low-yielding CD would have been the smarter buy? That’s the junk bond game. Yes, you’re going to suffer losses. But if gains, on average and over the long haul, across a diachronically, statistically-significant sample, are much bigger than losses --and much bigger than always playing it “safe”-- than why not allocate a portion of one’s capital to such situations? I haven’t run the numbers, and you might well not being interested in doing so, either. But such opportunities do exist.
Thanks for you post Junkman. We've been retired since 1995 (age 51 then) and have been thru 2 meltdowns and now sit watching the current mess. At age 65 now, we don't have the luxury of time on our side anymore, and safety of what we do have is paramount. The amount we have in PenFed is only a portion of the CDs that we have strewn between 4 different banks, an Ameritrade account & have recently been buying some shiny stuff. We'll leave the other things to people more willing take some risks, as we will no longer participate. Currently our income is far more than our out-go, and life is good.....retirement after all these years is getting better and better. There's almost nothing we haven't done in the past 14 years, and not much left that we are desiring to do other than to enjoy the time we both have left.
If you’re willing to buy CDs, then it has to be inferred that current-yield is more important to you than eventual cap-gains. Here’s a bond situation you might want to consider. Currently, there are 4 (1/1) of Ford Motors’ 7.7’s of ’97 .... Charlie,I have a question: would your suggestion here be different if the investor owned a decent chunk of Ford common stock?I struggle with the general question of whether corporate bonds should be treated strictly as a substitute for other bonds, or whether the corporate risk is similar to the risk you take when you buy stock. To use this example, if I had 75% of my money in Ford common and 25% in a CD and wanted to invest in Ford corporates, would it make sense to put the whole 25% from the CD? Keep some in the CD but sell some stock and combine that with the rest of the CD cash to open a bond position? Or keep the whole CD intact and sell shares to fund the bond position?You've said before that you're not a portfolio theory advocate, so I won't try to put it in those terms. But I think a lot of us seem ridiculously conservative here because we take our risks outside the bond market. thanks,dan
I struggle with the general question of whether corporate bonds should be treated strictly as a substitute for other bonds, or whether the corporate risk is similar to the risk you take when you buy stock. Dan,The bond heavies will probably be able to explain the risks better than me, but this is how I look at corporate bonds. To the extent a bond is top-quality, such that default-risk is a minimal consideration, is the extent to which buying the bond is making a bet on the direction of interest-rates. To the extent that it is company-specific facts and fundamentals that are driving the price of the bond is the extent to which the level or direction of prevailing interest-rates can be de-emphasized. In the case of Ford, to buy their common, or their debt, is to bet on the company’s prospects for survival, not on the direction of interest-rates. Yes, for sure, if interest-rates rise or fall, a company’s cost of capital changes. In some cases, that could make or break them. But the real action is with the company’s overall numbers, not just one specific one, the cost of capital. Marty Whitman, one of the best value investors there is, will buy the common and/or the debt as it makes the best sense to do so. In my experience, if an investor buys the common, instead of the bonds, he would realize about 3.5x the profits instead of buying the debt over the same holding period. But he would also experience proportional greater volatility, and that volatility matters to him, because the value of his investment is tied to price. Whereas the note-holder owns a put. He can ignore price fluctuations. Therefore, in one sense, the gains opportunity he suffers is the price of the put. Personally, I’m happy to pay the price. Owning puts lets me sleep at night, and the gains are good enough. To use this example, if I had 75% of my money in Ford common and 25% in a CD and wanted to invest in Ford corporates, would it make sense to put the whole 25% from the CD? Keep some in the CD but sell some stock and combine that with the rest of the CD cash to open a bond position? Or keep the whole CD intact and sell shares to fund the bond position?If you’re that over-weight Ford, it wouldn’t make a lick of sense of take on greater exposure, either through the common or the debt. Keep the CD and reduce your exposure to the stock. Use that cash to diversify your holdings. Only when you truly needed to find money to put to work should the CD be cashed out. Otherwise, you’ve over-leveraged yourself relative to your total risks. The name of the game isn’t profits, but survival. Screwing around with high-risk situations, which is what Ford is, can only be done responsibly with a portion of one’s working capital, and only if the purchases can be made at prices that offer a reasonable margin of safety for being “blue-light” bargains. For Bob to spend 5% of his CD money to build a diversified portfolio of high-yield investments is simply good sense. The possible damage can never hurt him, and the upside will make a difference to overall returns. For you in the –-I hope fictitious-- example of having 75% of the portfolio in a single stock, the numbers will play out differently. If you really want that kind of juice, then use options or stock futures and increase your allotment to cash/cash-equivalents even more, so that you deleverage your risks even further. Survival. You gotta survive the game if you want to play it. Making out-sized bets is asking for trouble.
Dan,I'll jump in mostly because I can rarely keep from doing so.I believe corporate risk should be considered when purchasing the common or the debt. How one chooses to price that risk has many choices. If one is starting to feel like an Enron employee then they may either walk away from adding either more common and/or debt or price their next purchase with a greater margin of safety. I often dig out my "corporate" risk number from the debt market. If F is priced higher or lower than its peers then that gives me F's "corporate risk" number. I'll use that number when I analyze and price both the debt and the common. F's risk is determined by either eye-balling the average for that maturity and rating or by selecting F's peers and generating an average (which ever works best for you). Once we have F's corporate risk premium in hand we can comparatively shop it around and/or determine if we are getting reasonably compensated for that risk. Once we have our magic number in hand we can go back and look at the debt market and see if there is a "better" deal to be had. Better may be higher return for same risk or possibly even less risk, better may also mean smaller return for less risk. Better is subjective to the individual investors needs. For instance if we have 5 peer companies 3 of which have very similar metrics, 1 of which has poorer metrics and 1 of which has better metrics we can use the risk premium so sort them out. It is possible that the company with the worst metrics is the company priced best. It is also possible that the company with the best metrics is priced the best. (again best can be subjective but sometimes it is obvious. Scenarios I:Company A risk premium .3 best booksB risk premium .2 average booksC risk premium .2 average booksD risk premium .2 average booksE risk premium .1 worst booksIn this case Company A is the obvious choice. It has the best books while the market is pricing it cheaper than its peers.Scenario II:A risk premium .1 best booksB risk premium .2 average booksC risk premium .3 average booksD risk premium .2 average booksE risk premium .3 worst booksThe toss up here is between A and C. C is priced better than the two others with average books. A is probably the safest bet and priced as safer.Scenario III:A risk premium .1 best booksB risk premium .2 average booksC risk premium .2 average booksD risk premium .2 average booksE risk premium .3 worst books<shrug> no obvious choices. What are you/we looking for? What risk reward to you want/need to buy? Can you walk away?Personally, I am very rarely into a company for both their common and their debt. I do consider how much exposure I have to any one company but for the most part my methods of analysis drive me to purchase one or the other. If the risk/reward is in the common there is no good reason to settle for lower returns. If the risk/reward is in the debt there is no reason to expose myself to the higher risk. Clear as mud?jack
Thanks for the reply - that's very helpful. In my experience, if an investor buys the common, instead of the bonds, he would realize about 3.5x the profits instead of buying the debt over the same holding period. But he would also experience proportional greater volatility, and that volatility matters to him, because the value of his investment is tied to price. Whereas the note-holder owns a put. He can ignore price fluctuations. Therefore, in one sense, the gains opportunity he suffers is the price of the put. Personally, I’m happy to pay the price. Owning puts lets me sleep at night, and the gains are good enough. I interpret this as saying that from a risk perspective, owning a full position in corporates is roughly equivalent to having 1 / 3.5 = about 30% of that money in the stock and the remaining 70% in a principal-protected instrument like a CD. It'd be interesting to see which provides the better return: I wouldn't be at all surprised if the bonds beat the stock+cash combo. If you’re that over-weight Ford, it wouldn’t make a lick of sense of take on greater exposure, either through the common or the debt. Yeah, my example stank because I didn't really mean to concentrate it in one stock any more than you were saying only to buy Ford bonds and no other corporates at all. But the more general question of what to do if you've got 75% of your port in diversified stocks and 25% in CDs and want to get into corporates is more useful. And what I hear you saying is that corporates can be just as good a replacement for a stock position as they are in replacing a CD or cash position.Thanks again!dan
Bob, Excellent. You've got a plan, and you're sticking with the plan. Kudos.The main reason I did the write up is that the introductory bond books never talk about how to game ultra long-dated bonds. Also, not many come onto the market, and not many are suitably-priced for "annuitizing". Just now, I did write an order to buy one of the four offered for my own account, because those kinds of situations interest me, and because I have cash needing to be spent, and because I eat my own cooking. (If I talk about a bond, you can bet I'm buying and/or own it.) The price I will pay is roughly 4x where the bond could have been bought earlier in the year. But the prospects for Ford weren't as bright as they are now, either. So that's the trade-off being made: price-risk versus information-risk. My purchase price, as a percentage of assets under management, is less than 15 basis points. So the position is tiny. But when enough of those tiny positions are held, risks get averaged and gains can be captured. Wow. It has taken Zions 11 minutes to acknowledge my order, and the underlying desk isn't responding. For sure, the dealer would like to sell all four as a single lot, so he's probably delaying, hoping to get a better bid. OK. At 4:36 I got a fill. Zions reports my YTM will be 10.287%, which I don't care about. My concern is the current-yield on that bond, and now I'm done for day.PS If anyone is curious, here's T&S. http://cxa.marketwatch.com/finra/BondCenter/BondTradeActivit...
Hey Jack -Thanks for chiming in with your analysis. Let me see if I can paraphrase to see if I understand. It looks like you:1 - See if companies looks attractive as an investment generally from a fundamental perspective.2 - Turn to the bond market to see how they compares with each other. That may generate an optimal choice, or it might make things murky.3 - Depending on whether the common or the debt offers the better risk/reward tradeoff, pick one or the other but rarely both.Did I get it? That all makes sense to me.thanks,dan
And what I hear you saying is that corporates can be just as good a replacement for a stock position as they are in replacing a CD or cash position.No, no, no. Corporates are not "safe" in the same way that a CD is safe with respect to default-risk. The best triple-AAA corp isn't a cash-substitute. If principal is at risk, then it cannot be a principal-protected instrument in and of itself. Through some fancy financial shenanigans, it could be converted into a synthetic CD. But that's a different animal and far beyond my expertise. (But there's an interesting article some where --I don't remember where-- that talks about the intersting (and effective) stuff Bill Gross is doing with derivatives and such to redefine the term "cash-equivalents" and then deploy them in his portfolios.)If you're insisting on talking in terms of "portfolio theory", then let's talk it. Consider "asset classes" --which is actually a tough thing to define- to be the equivalent of paint pigments on an artist's palate. Can a picture be drawn with just one color? Sure, but not much of a picture can be drawn in just the air. Paint (or charcoal, or mud mixed naturally occurring ochre) has to be applied to a more or less durable surface. In a portfolio, cash is the background against which foregrounds are created. But that foreground can eat the background. Therefore, cash has to be held in reserve. How much depends on how aggressive the foreground is, and that quickly gets into the topic of risk-management. A guy you ought to read is Perry Kaufman. In Smarter Trading, he tells the story of some of the fights he's had with "risk-managers" at the firms he traded for, not a one of them understood the least thing about risk-management. Kaufman was trading a strategy and making good money. But the manager saw he wasn't deploying all of the capital allotted to him and wanted to take it away. Kaufman replied that he was, in fact, using the capital. That parked cash was absolutely essential to the survival of the account which had to be able to endure draw-downs and keep trading. Why did LTCM blow up? Why did Bear Sterns blow up? Why do some many investors and traders blow up? They fail be deleverage their risks to a survivable level. Cash is a tool that must be used wisely. Trying to sneak assets which aren't true cash-equivalents into the portfolio's needed cash allocation --in the search of a bit more return-- is asking for trouble.
I'll find that Kaufman book, although the example you use is pretty clear in itself. Cash is a tool that must be used wisely. Trying to sneak assets which aren't true cash-equivalents into the portfolio's needed cash allocation --in the search of a bit more return-- is asking for trouble. Agreed. My first thought though was that if you believe this too, then some of your comments about principal-protected stuff like CDs don't seem to make sense. But since a CD isn't really a true cash-equivalent -- especially a 3-5 year one -- I think I understand what you mean: that there's no substitute for true liquidity.best,dan
Dan,1 - I am a fundie but charts are not evil. I really don't care where I get the idea to investigate; bottom up, top down, hot tip from a trucker it just doesn't matter.2 - I do use the bond market to get a sense of comparison. This method on its own occasionally clarifies but rarely creates greater murkiness. Most often it is simply one more data point to peruse. 3 - pretty much nail on head. jack
ARRRGH. Dan, You and I really are on different pages. That's not a bad thing. It's just frustrating for me, because I know what I mean to say, but it doesn't translate into your framework in the way I was expecting.Yes, I think a lot of people think a lot of stupid things about risk-management. "If I'm buying CDs, then I'm a prudent investor." No, a CD isn't an investment. It's a savings vehicle, and, on average, it is an inappropriate vehicle if one's intention is to preserve --much less appreciate-- purchasing-power through its purchase. But if that CD can be bought at an attractive price as part of a total financial plan, then go for it. In Bob's case, he seems to have decided that conservation of purchasing-power meets his needs, the steady but minor loss of purchasing-power from buying 7-year CDs at 4-4.45% is a price worth paying for securing the integrity of his principal. That's a totally defensible choice. But that's not the game I play for myself. Hence, my comments about cash/investing/etc. have to be understood within a different context and set of rules. If you're going to look for Kaufman's book, look for a later one, the third edition of his Trading Systems and Methods. Or just pull Graham's classic off your shelves and give that a re-read. But the book you'd probably most enjoy and benefit from is Justin Mamis' The Nature of Risk.
You and I really are on different pages. That's not a bad thing. It's just frustrating for me, because I know what I mean to say, but it doesn't translate into your framework in the way I was expecting. Yeah, I know. I recognize that gap and try to bridge it sometimes, because I don't think it's unbridgeable. But I'll admit it causes frustration sometimes, for which I apologize. I appreciate your trying to push through anyway!best,dan
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