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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Wal-Mart's Bonds Date: 3/27/2009 2:33 PM
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I'm a person who “eats his own cooking”. If I suggested in another thread that now is a good time to be shopping for bonds, then shopping I go. How I got to looking at Wal-Mart's bonds doesn't matter. But I got to looking at them to see what might be happening. E*Trade was listing 16 offerings, as was Zions, but not the exact sames ones, which is typical. Every bond broker will offer you a slightly different inventory that often has slightly different pricing. So that's always Rule #1 with bond shopping: "You gotta shop around". But in the initial stages of trying to see what's happening, those kinds of small differences don't matter. What you want is just a general sense of where the market is at with respect to their debt:

How much of it is being offered?
Does it seem like someone is dumping?
How tightly is it bid?
How accessible is it? (i.e., what's a typical minimum-purchase?)
What's the shape of its yield-curve? (Where are the “sweet and “sour” spots?)
And, especially, is its yield-curve inverted?

That last point, "yield-curve inversion", is all the warning you need to proceed no further. The market is betting that the company is headed toward a Chapter 11 filing. That's a train-wreck you do not want to get in front of. (Recognizing inversions would be part of Jack's toolbox of “mark-with-chalk, cut-with-ax”.)

Wal-Mart's yield-curve is normal, a bit steep at the front-end, but normal. That's A-Good-Sign (AGS). The yield are paltry, but that's the case these days with the bonds of companies that the market is betting have the best chances of surviving the recession. Quality and Safety cost money. So “safe” debt doesn't come cheap. So the question with respect to Wal-Mart's debt is this: "Are their bonds cheap enough to merit further investigation?"

Of the sixteen maturities being offered, fifteen are priced above par. That is Not-A-Good-Sign (NAGS). Some of the premiums are paltry, less than a point. But several are a whopping 15-16 points. Ouch! That would hurt, especially if the bonds were long-dated. The thinking is this: You'd be trading a lot of present-day, nominal cash in exchange for much less nominal cash in the long-distant future whose purchasing power, most likely, would be much diminished by the ravages of inflation. The CAPM boys could provide you with very precise estimates of what that future cash would be presently worth. But since the assumptions they use to make their estimates are the same, very imprecise guesses you yourself have to make about the future course of inflation, you could just rely on gut feelings as the basis of a decision to Avoid-That-Kind-of-Hassle (ATKOH). If you want to bet on inflation, for or against, there are more effective tools than long-dated bonds that cost a huge premium-above-par to buy.

Regrettably, the best buying-point in Wal-Mart's yield-curve (IMHO, 'natch) is their 7.55's of '30. However, the ask is roughly 16 points above par. That's a trade I would back away from doing. The broker's reported YTM of 6.15% YTM just isn't worth the risk. Furthermore, when you run your own YTM numbers through Excel, allowing for a $5 commish to do the the trade and properly subtract the premium-to-par from your total-returns, the effective YTM is ~30 bps less, or 5.82%, which is Really-Not-Worth-The-Risks (RNWTR).

I'd love to be able to buy Wal-Mart's bonds. They're a well-managed company with a huge global-presence. They are going to survive. But, currently, their debt is prohibitively-expensive. They are the sort of company you put on a wish-list/watch-list against the day when something truly crazy happens and their bonds, inexplicably, get put on a fleeting, Blue-Light Special (BLS). If such a thing happens, you execute and call it Luck (L). But, as the wags have noted, luck is mostly preparation, plus opportunity (L=PPO). That's why you do your homework now, so you can act then.

Charlie (who now returns to his shopping)
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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26575 of 35367
Subject: Re: Wal-Mart's Bonds Date: 3/30/2009 11:33 AM
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<run your own YTM numbers through Excel>

Please share your equations.

Thanks,
Wendy

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26580 of 35367
Subject: Re: Wal-Mart's Bonds Date: 3/30/2009 12:22 PM
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Wendy,

Somewhere, in one of my posts, I worked an example of how I calculate YTM. It's there, somewhere, and I'm not going to repeat it for this reason.

YTM, like every concept that has to do with bond investing, can be thought of in many different ways, none of which are "correct", only merely useful. How I do it is useful to me. How you might want to do will be useful to you.

Therefore, just grab a scratch pad and a calculator and start figuring out what you intend to mean to yourself by YTM. Seriously, every single concept in investing has to be tested by the investor who intends to use that concept. Period. There are no exceptions. Every concept has to be tested by the user and adapted to the user, by the user. Take nothing for granted.

That's partly why I'm ripping through the portion of the Bond FAQ that deals with corporates. It was written by someone (or someones) who know nothing worth knowing about corporates, and they did a bad job of writing what they thought they knew. It's garbage, garbage, garbage that they cribbed, rather than rethinking afresh from actual experience about what coulda/ shoulda been said. Not that my versions are the only versions. Far from it. But they are an honest and authentic viewpoint from someone who has actually bought a corporate bond or two (or many many hundred over many years).

I suspect I know who the lead writer was for the corporate portion of the FAQ, and he's never bought a corporate in his life. With other bond types, his word is golden. He loves them and understands them and his insights are shrewd and are to be trusted. But how to invest in corporates safely and effectively? Fat chance. The lack of experience with the asset class shows in the writing. But what is more telling is the lack of passion with which the topics are presented. The viewpoint isn't that of someone who loves his subject matter so much and knows hi subject so deeply that he is constantly having to constrain himself from wanting to share everything he knows. Instead, the writing is painfully dutiful. It's "yadda", "yadda", "yadda". The writing is inaccurate, incomplete, misleading, disingenuous, harmfully partisan, boring, and a total waste of time to read.

The moral of that rant is that you gotta run your own numbers if you want numbers you can trust. Figure out what you want YTM to mean to you, and go for it.

Best wishes, C

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26591 of 35367
Subject: Re: Wal-Mart's Bonds Date: 3/30/2009 5:28 PM
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<Somewhere, in one of my posts, I worked an example of how I calculate YTM. It's there, somewhere>

Impossible to find with TMF's poor search engine.

Less work to copy and paste an equation than writing a fresh rant.

Thanks,
Wendy

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26619 of 35367
Subject: Re: Wal-Mart's Bonds Date: 3/31/2009 5:17 PM
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I had said: Somewhere, in one of my posts, I worked an example of how I calculate YTM. It's there, somewhere >

You replied: Impossible to find with TMF's poor search engine. Less work to copy and paste an equation than writing a fresh rant.

Wendy,

All of my work is "folk" (which you seem to think is inferior to "non-folk" sources). Why are you asking me to share my work with you?

Which is it to be? If you opt for the latter, then here's the link you need. http://en.wikipedia.org/wiki/Yield_to_maturity

If the former, then start reading. It's there, somewhere, and I'm not going to copy and paste it for you. Do need to do your own homework.

Best wishes, Charlie

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Author: richinaz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26641 of 35367
Subject: Re: Wal-Mart's Bonds Date: 4/1/2009 7:12 PM
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There was a recent article on corporate bonds at:
http://seekingalpha.com/article/128479-an-investor-s-guide-t...

It seems like a decent primer but I'm not a bond person. YMMV.


Rich

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26643 of 35367
Subject: Re: Wal-Mart's Bonds Date: 4/1/2009 7:30 PM
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Rich,

The article looks solid to me, and a good place for someone to begin.

(Disclaimer: I only skimmed it. But nothing jumped out as being misleading or off the wall. In general, the articles that find their way to Seeking Alpha tend to be high quality.)

Good link, Charlie

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