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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 35387  
Subject: SLM’s Bonds Date: 1/8/2013 1:03 PM
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First, a preface.

How To Get Unstuck
Every trader gets stuck at one time or another. Doesn’t matter the level of skill attained – no one is immune. Contrary to what you might believe, professionals don’t knuckle down and “power through” either. They do just the opposite: they back off. Sometimes you have to surrender the day to win the week, or surrender the week for the month, the month for the year. Obviously, I’m speaking about perspective.

In yoga, it’s possible to be able to do a pose one day but not the next. It’s baffling, but try to go too deep on a hamstring stretch and you’ll be out of action for quite a while. You have to back off and say “not today.” This is not a sign of weakness, but one of strength – for a few reasons. One, your competition may not have this skill and --sadly--- grind themselves into lower returns because they get too invested in doing things their way, not on the market’s terms. The second is, you preserve your sanity and a great deal of brain cells by backing off. If you plan on trading as a career for many years, what does a month mean? Not much.

In order to get unstuck, read fiction, go to the museum, take a new language class, or learn to play the banjo. Do something disruptive to your spirit that has nothing to do with trading. You’ll eventually find out that it has everything to do with trading. In each of these cases, you also preserve your equity – which is the first order of business. After many years you’ll come to know, as I know, that the best traders are the ones who play superior defense.
http://www.martinkronicle.com/?s=How+to+gt+unstuck

A few minutes into my bond shopping today, and I had to admit I was “stuck”. My heart just wasn’t into doing the work it takes to find, vet, and then execute. So I backed off and ran a practice scan instead on Sally Mae (reproduced below). A couple of points are obvious. Even the trash has gotten expensive. And it just doesn’t pay to go very far out on the yield-curve. If you read my posts (and I hope I’ve chased most people away by now), you’ll know how to interpret the column labeled “Adj_YTM”. For those of you new to the class, here’s a quick translation.

Broker’s calculated yields aren’t what you can spend. What you can spend is net of taxes and net of inflation. Everyone’s tax-rates and personally-experienced inflation-rates are going to be slightly different. But something in the range of 25% to 30% is a good estimate of the impact of taxes on yields, and something into the range of 5% to 6% is a good estimate of the impact of inflation on purchasing-power. The net-effect of the two is that is takes a nominal YTM in the range of 8% just to break even with respect to preserving one’s purchasing-power, never mind actually appreciating one’s capital. 8% is a tough benchmark to meet. But if you’re pulling less out markets, you’re just a hobbyist, not an investor. You’re having fun. But you’re paying to play.

Later, Charlie
----------------------------
 
The current offering-list for SLMs bonds.

Cpn Due YTM Adj_YTM Best
0.910 03/15/13 0.0% -8.5% -8.5%
5.350 03/15/13 0.6% -9.0%
4.550 06/15/13 0.4% -6.6% -6.6%
4.800 06/15/13 0.5% -6.5% -6.5%
4.700 06/15/13 0.5% -6.5% -6.5%
4.750 06/15/13 0.4% -6.7%
4.500 06/15/13 0.4% -6.6%
4.000 06/15/13 0.4% -6.6%
4.000 06/15/13 0.4% -6.6%
6.221 06/15/13 0.0% -4.6% -4.6%
3.640 06/15/13 0.0% -6.0%
6.075 09/15/13 0.0% -3.0% -3.0%
4.282 09/15/13 0.0% -4.4%
4.290 09/15/13 0.0% -4.1%
5.000 10/01/13 0.8% -5.6%
3.708 11/01/13 0.0% -4.4%
5.750 11/21/13 0.0% -2.7% -2.7%
4.300 12/15/13 1.0% -5.1%
4.250 12/15/13 1.0% -5.1%
5.000 12/15/13 1.0% -5.2%
5.150 12/15/13 1.0% -5.2%
3.964 12/15/13 0.0% -3.9%
4.114 12/15/13 0.0% -3.9%
5.000 12/15/13 1.0% -5.2%
5.859 12/15/13 0.0% -2.5% -2.5%
5.045 01/31/14 0.0% -2.6%
4.975 02/01/14 0.0% -3.2%
5.719 02/01/14 0.0% -2.2% -2.2%
5.100 03/15/14 1.4% -4.7%
3.432 04/01/14 0.0% -3.6%
2.768 04/01/14 0.0% -3.8%
4.770 04/01/14 0.0% -2.0% -2.0%
2.000 04/25/14 0.0% -3.8%
4.625 05/01/14 0.0% -2.5%
5.375 05/15/14 1.5% -4.6%
6.009 06/02/14 0.0% -1.6% -1.6%
4.000 06/15/14 1.8% -4.2%
3.500 06/23/14 0.0% -3.2%
3.500 07/01/14 0.0% -3.2%
4.000 07/25/14 0.0% -3.2%
4.250 08/11/14 0.0% -3.5%
1.479 09/15/14 0.0% -3.5%
2.556 10/01/14 0.0% -3.4%
5.050 11/14/14 2.0% -4.0%
4.721 12/15/14 0.0% -1.7%
4.471 12/15/14 0.0% -2.4%
5.014 03/15/15 0.0% -1.3% -1.3%
4.000 03/15/15 0.0% -2.9%
5.000 04/15/15 2.1% -3.8%
4.521 06/15/15 0.0% -1.9%
3.720 08/25/15 0.0% -1.4%
3.875 09/10/15 2.5% -3.4%
3.582 09/15/15 0.0% -2.0%
4.100 12/15/15 1.7% -4.1%
3.458 12/15/15 0.0% -2.6%
2.920 12/15/15 0.0% -2.3%
3.103 12/15/15 0.0% -3.0%
4.770 12/15/15 0.0% -1.7%
6.250 01/25/16 2.6% -3.5%
4.962 02/12/16 0.0% -1.1% -1.1%
6.000 01/25/17 3.4% -2.7%
2.987 02/01/17 0.0% -2.3%
4.625 09/25/17 3.8% -2.2%
4.700 12/15/17 0.3% -1.6%
5.250 03/15/18 1.5% -1.2%
6.000 06/15/18 2.8% -0.8% -0.8%
5.000 06/15/18 2.7% -1.4%
8.450 06/15/18 4.5% -2.0%
5.950 12/15/18 1.5% -0.6% -0.6%
3.942 05/03/19 0.0% -1.3%
6.000 06/15/19 1.0% -0.6% -0.6%
8.000 03/25/20 5.3% -1.3%
7.000 12/15/20 2.6% 0.2% 0.2%
7.000 03/15/21 1.0% 0.2%
5.000 03/15/21 5.1% -1.2%
7.000 06/15/21 1.0% 0.2%
7.000 06/15/21 1.0% 0.2%
6.000 06/15/21 6.1% -0.5%
6.100 06/15/21 6.1% -0.4%
6.150 06/15/21 6.2% -0.4%
7.250 01/25/22 5.5% -1.0%
5.400 04/25/23 6.0% -0.5%
5.500 03/15/24 5.5% -0.9%
5.750 03/15/24 5.8% -0.7%
5.750 03/15/24 3.8% -0.7%
5.750 03/15/24 6.1% -0.7%
5.500 03/15/24 6.2% -0.8%
6.500 06/15/24 3.8% -0.2%
6.000 06/15/24 1.6% -0.5%
6.150 06/15/24 6.2% -0.3%
6.200 06/15/24 6.3% -0.3%
6.100 06/15/24 6.1% -0.4%
6.000 06/15/24 1.6% -0.5%
6.000 06/15/24 1.6% -0.5%
5.625 01/25/25 5.7% -0.7%
5.750 03/15/25 5.6% -0.7%
6.150 03/15/25 6.3% -0.3%
6.000 06/15/26 6.0% -0.5%
6.000 06/15/26 6.0% -0.5%
6.200 09/15/26 6.4% -0.2%
6.000 12/15/26 6.2% -0.4%
6.000 12/15/26 6.2% -0.4%
6.000 12/15/26 6.2% -0.4%
6.050 12/15/26 6.2% -0.3%
6.500 03/15/27 6.6% -0.1%
6.000 03/15/27 6.2% -0.4%
5.550 03/15/28 5.9% -0.6%
5.450 03/15/28 5.9% -0.5%
5.250 03/15/28 5.5% -0.8%
5.550 06/15/28 5.9% -0.5%
5.500 06/15/28 5.9% -0.6%
5.450 06/15/28 6.0% -0.5%
5.300 06/15/28 5.4% -1.0%
5.250 06/15/28 6.0% -0.4%
4.800 12/15/28 5.6% -0.7%
5.000 12/15/28 5.6% -0.8%
5.300 12/15/28 5.6% -0.8%
6.100 12/15/28 4.1% -0.5%
6.000 12/15/28 6.1% -0.4%
5.700 03/15/29 6.0% -0.5%
5.700 03/15/29 6.0% -0.5%
5.650 03/15/29 6.0% -0.5%
5.750 03/15/29 6.0% -0.5%
5.600 03/15/29 6.5% -0.1%
6.000 03/15/29 6.2% -0.3%
5.650 03/15/29 6.5% -0.1%
5.700 03/15/29 6.5% -0.1%
5.750 03/15/29 6.6% -0.1%
5.750 03/15/29 6.5% -0.1%
5.700 03/15/29 6.4% -0.2%
5.700 03/15/29 6.5% -0.1%
5.700 03/15/29 6.5% -0.1%
6.000 06/15/29 6.4% -0.2%
6.250 06/15/29 6.4% -0.2%
6.250 06/15/29 6.5% -0.2%
5.750 06/15/29 6.4% -0.2%
5.500 06/15/29 6.5% -0.1%
5.500 06/15/29 6.5% -0.1%
5.500 06/15/29 6.4% -0.2%
5.600 06/15/29 6.4% -0.2%
5.750 06/15/29 6.6% -0.1%
6.000 06/15/29 6.4% -0.2%
6.000 06/15/29 6.5% -0.2%
6.250 06/15/29 6.4% -0.2%
6.000 09/15/29 6.5% -0.1%
6.250 09/15/29 6.7% 0.0%
6.250 09/15/29 6.6% -0.1%
6.250 09/15/29 6.5% -0.2%
6.150 09/15/29 6.5% -0.2%
6.000 09/15/29 6.5% -0.2%
6.000 09/15/29 6.5% -0.2%
5.900 09/15/29 6.5% -0.2%
6.000 09/15/29 6.4% -0.2%
6.000 09/15/29 6.5% -0.1%
5.750 09/15/29 6.6% -0.1%
5.850 09/15/29 6.5% -0.1%
5.850 09/15/29 6.5% -0.1%
5.750 09/15/29 6.5% -0.1%
5.650 12/15/29 6.5% -0.1%
5.700 12/15/29 6.5% -0.1%
5.750 12/15/29 6.6% -0.1%
5.650 12/15/29 6.5% -0.1%
5.600 12/15/29 6.5% -0.1%
5.750 12/15/29 6.4% -0.2%
5.600 12/15/29 6.5% -0.1%
5.650 12/15/29 6.5% -0.1%
5.750 12/15/29 6.5% -0.1%
5.750 12/15/29 6.5% -0.1%
5.750 03/15/30 6.3% -0.3%
5.700 03/15/30 6.4% -0.2%
5.650 03/15/30 6.2% -0.4%
5.500 03/15/30 6.1% -0.4%
5.500 03/15/30 6.4% -0.2%
5.400 03/15/30 6.2% -0.3%
5.500 06/15/30 6.1% -0.5%
5.750 06/15/30 6.4% -0.2%
5.500 06/15/30 6.2% -0.3%
5.650 06/15/30 6.4% -0.2%
5.500 06/15/30 6.1% -0.5%
5.400 06/15/30 6.3% -0.3%
5.300 09/15/30 6.1% -0.4%
5.650 09/15/30 6.1% -0.4%
5.500 12/15/30 6.2% -0.3%
6.000 06/15/31 6.6% -0.1%
6.000 06/15/31 6.5% -0.2%
6.350 09/15/31 6.6% -0.1%
6.250 09/15/31 6.4% -0.3%
6.250 09/15/31 6.6% -0.1%
6.400 09/15/31 6.6% -0.1%
6.500 09/15/31 6.7% -0.1%
6.450 09/15/31 6.6% -0.1%
6.350 09/15/31 6.5% -0.2%
6.300 09/15/31 6.6% -0.1%
6.100 12/15/31 6.6% -0.1%
6.000 12/15/31 6.7% -0.1%
6.000 12/15/31 6.4% -0.2%
6.150 12/15/31 6.5% -0.2%
6.200 12/15/31 6.6% -0.2%
6.000 12/15/31 6.5% -0.2%
5.850 12/15/31 6.2% -0.4%
6.000 12/15/31 6.5% -0.1%
5.850 03/15/32 6.5% -0.1%
5.800 03/15/32 6.7% 0.0%
5.650 03/15/32 6.2% -0.4%
5.700 03/15/32 6.3% -0.3%
5.800 03/15/32 6.6% -0.1%
5.800 03/15/32 6.6% -0.1%
5.850 03/15/32 6.6% -0.1%
5.850 03/15/32 6.4% -0.2%
5.850 06/15/32 6.6% -0.1%
5.850 06/15/32 6.6% -0.1%
5.750 06/15/32 6.4% -0.2%
5.750 06/15/32 6.6% -0.1%
5.625 08/01/33 6.1% -0.5%
6.000 03/15/37 6.5% -0.2%
6.000 03/15/37 6.6% -0.2%
6.000 03/15/37 6.6% -0.2%

NOTE: Some YTMs are reported as 0%. That’s E*Trade’s way of coding those that are variable-coupon bonds. When you dig into the formulas and run calcs, their yields are typically in line with their fixed-coupon peers of similar maturity.
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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: 34625 of 35387
Subject: Re: SLM’s Bonds Date: 1/8/2013 2:30 PM
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Yeah, I admit, some of the numbers in the columns are confusing. I should have included the asking prices and whether the bond is callable. Those facts are what's needed to unravel the discrepancies between what E*Trade estimated the nominal YTM would be and my number for its estimated after-tax, after-inflation YTM. But I trust my numbers, and I've done the exercise hundreds of times, across thousands of bonds, and it's nothing more than a starting point. If a bond can't pass my tax-and-inflation filter, I don't dig into it further.

Obviously, there are exception to that rule of thumb, such as when I'm deliberately looking for mis-priced high-quality debt whose holding is going to cause me a loss of purchasing-power. But most of what would fall into that category has gone ballistic in price these days and is trading at premiums so far above par as to be toxic to one's account, a point that Ben Graham made in The Intelligent Investor. Overpaying for what would otherwise be high-quality assets is to buy trash. Conversely, buying trash at deep discounts creates a high-quality investment. So 'price' --relative to 'value'-- matters hugely, and right now, the bond market is very over-bought, which is not to say that the bull bond is dead, or maybe even dying. Secular bull markets --like secular bear markets --of which we are currently in one for equities, with at least another 6 to 7 years to run -- have strong rallies and strong retracements within them. A commonly used metaphor to describe the various cycles is 'ripple', 'wave', 'tide'. Was the move up in the interest-rate for the 10-year a ripple, a wave, or the manifestation of tide? Who knows? and no one should have positioned themselves to be harmed if they guessed wrong.

The bottom for interest-rates might have been put last July when the long bond tagged 2.47%. Or the bottom might lie ahead of us in negative territory. I have no idea, nor do I attempt to forecast. Such prediction games, as Taleb argues, cannot be done, because meaningful predictions can't be made in the 4th Quadrant. At best, one should focus on the other half of the problem, protection from the unexpected and unforecastable, and stop doing things like building houses on "100-year" flood plains or listening to "market strategists". Rates are going to up from here, and rates are going to go down from here. That's a bettable certainty. "Your worst draw-down is yet to come." But the 'whens' and 'whys' are beyond our ken. So, get used to living with uncertainty, which is actually good for you (up to a point), as he argues in his recent book, and about which nothing can be done anyway. Governments, economies, and markets are going to blow up, especially when efforts are made to prevent those blowups.

Charlie

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