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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 35272  
Subject: Penney’s Bonds, Again Date: 11/19/2012 3:39 PM
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Below is a table of Penney’s yield-curve as of 12:40 Eastern today, based on buying a single through E*Trade.
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Comments on tactics:
Their Ba3/B- rating isn’t as bad as I was remembering, as isn’t their balance-sheet, though the short-ratio (a whopping 39.8%) certainly is. The stock guys are hammering JCP hard. But, at some price, it might be worth the risk of taking a position in their debt, and in my IB account just now, I grabbed a single of the 6.375's of ’36 that had come onto the market at 73.

Ideally, when you're buying any issuer's debt, you want the maturity that gets you out the soonest with the mostest total-yield, so you can turn over your capital as fast as possible. This doesn't mean you're 'trading'. It only means you're being very efficient about your 'investing'.

But if you're faced with a highly probable, Chapter 11 filing (and I estimate the odds at 1:4 to 1:3 for Penneys), you want to get in --if at all-- at the lowest price, so as to minimize the possible damage to your account. Thus, if it were a fairly sure thing that Penney's wouldn't be filing BK, the 5.75's of '18 would be the maturity to buy, and, initially, I bid for them. But the market-makers at IB wouldn't give me a fill in my size, and they started jacking up prices as well, going from 86.00 to 86.500 to 86.6670. (AT ET, the price was also bumped up, by only by a quarter point.)

But it annoys me when marker-markers screw around with prices rather than honoring them. So I cancelled out, reconsidered, and then went after the 6.375's of '36 instead, and I happened to stumble onto a discounted single that met my needs exactly, namely, some exposure to JCP and at a tolerable price/risk ratio. So I did the trade, and on margin to boot, because I'd run my cash at IB down to a mere $240, though there's a deposit of $5k pending clearance. So the margin interest will be tolerable (LIBOR plus 0.5) and brief.

I've owned Penney's debt before and made decent money. But maybe a year ago, I took myself flat on what I owned, because the company wasn't doing well. Rather than hang around and wait to see what would happen, I got out, which isn't something I often do. Generally, I buy with the intention to hold to maturity. But I'm willing to admit it when I'm wrong and to take corrective action. Getting out of Penneys (which, if I'm remembering right, I was able to do at break-even prices or slight profits) seemed like the prudent thing to do at the time. So I did it.

Now, it seems as if there might be an opportunity for a re-entry. But it's nothing about which I have much conviction. Mostly, I'm just trying to spend down surplus cash in the least-worst ways possible. Hence, I'm buying small (but frequently and widely). If I'm right, I make a few bucks. If I'm wrong, the damage is tolerable. And then I do it over and over and over again, year after year, winning some, losing some, but on average and over the long haul, making decent enough money. E.g., I'm expecting this year's returns to be similar to last year's, a modest 10%-11%. That's far smaller money than the stock guys make. But I don't like to take on the risks that they do. I'm the most timid of timid investors, someone who hates to lose money.

But, also, I'm someone who realized long ago that 'risk' cannot be avoided, only managed, and what is reputed to be 'safe' generally isn't. What you might gain by avoiding default-risk, you pay for heavily --if not excessively-- in tax-risk and inflation-risk. So you must choose your game carefully, so it matches your temperament, and some people just aren't 'stock guys', just as most people, if Dalbar's 20-year studies of investor behavior and results are credible, aren't effective bond-investors, not when they under-perform their benchmarks so badly. Stocks, bonds, commodities, whatever, it all is just a negative-sum game in which you and a counter-party are making bets with each other about unpredictable events, and one of you will be wrong. Your job is to try to ensure it is the other fellow and that you walk out of the securities casinos with more money than you brought to them. In short, bet on Penny's debt if the risks (and, hopefully, the rewards) appeal to you, but don't over-bet your hand.

To quote a bush pilot's proverb,"There are bold pilots, and there are old pilots. But there are no old, bold pilots. The same is true in investing. Focused-betting can produce big gains. But it can also produce big losses. In the short run of 30-50 years, focused betters can do well. But when the alternative histories of each of those bets are considered, how many of those results can truly be ascribed to skill ratter than just an outlier run of good luck? If you're playing the securities game for the long haul, you can't bet big and expect to survive.

Buffet is merely lucky, as plenty of studies document, with a low cost of capital that he leverages, and, currently, he's running nothing better than a closet, SP500-index fund, albeit a very big one. Look elsewhere if you want to find an investing role model or someone who truly understands markets and risk-management. Suggestion: Look at Linda Raschke's writings. She's an abashed 'trader' who works in time-frames and with contracts that would scare most investors. But would-be 'investors' can learn a lot from her methods and discipline, as they can from a whole host a market participants whom most investors have never heard of, all of whom are almost fanatical about identifying and then managing their risks.

Why did the average, fixed-income investor achieve only 16% of their benchmark over a 20-year time-frame? Stupidity can't be the whole of the answer, nor can it be a lack of access to adequate training. But, nonetheless, that was the track record of the average, fixed-income investor as is reported by Dalbar. Clearly, those losers made no effort to understand the game they were playing. They merely showed up at the front door of the securities casino and, somehow, expected to win. The average, equity investor didn't do much better. They under-performed their benchmark by one-third. (To read the study, enter these terms into a search-engine < DALBAR, QAIB, 2012, advisoreditionfreelook.pdf >

Now I go back to my rod-building, a 7'6", 6pc, 4wt I'm hoping finishes out at 65 grams.

Charlie
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Prices and Yields for Penney's bonds at E*Trade as of 12:40 EST Nov 19,
where 'AdjYTM' is an after-tax and after-inflation calculation that attempts to estimate 'real-return'.

Cpn Due YTM AdjYTM Price
6.875 10/15/15 8.2 1.1% 97.500
7.650 08/15/16 8.8 1.6% 97.250
7.950 04/01/17 9.2 1.9% 96.500
5.750 02/15/18 9.2 2.0% 87.250
5.650 06/01/20 8.5 1.6% 85.250
7.125 11/15/23 9.1 1.8% 87.500
6.900 08/15/26 7.1 0.3% 99.000
6.375 10/15/36 8.9 1.4% 76.000 <<== I squeaked in at 73, plus $5 for commish
7.400 04/01/37 9.0 1.3% 85.000
7.625 03/01/97 9.6 -0.5% 80.578
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