No. of Recommendations: 3
Finally, the stock market is backing off from its overly-bought levels. E.g., the DJIA has backed off from its nearby high last Monday of 11,149 to its present 10,436. That is a modest and needed correction of only (-6.4%). Obviously, there will be more to come.

How have bonds fared by comparison? Depending on which benchmark you use, bonds continue to gain in price, though quite modestly. E.g., from last Monday’s close of 104.38, for a broad index such as AGG, to today’s 105.09 is a modest gain of a mere 68 basis points. But let me ask you this. Would you rather have enjoyed a -6.4% loss to your portfolio, or a 0.68% gain?

Now here is the bad news. The past week’s loses for stocks still haven’t created any bargains. The past week’s gains for bonds continue to take them away. But those who did their bond buying when it should have been done, at the prices it should have been done, as a Ben Graham-style value-investor should have, are now enjoying very fat gains that often exceed 100%. Let me repeat that, so there will be no misunderstanding: Bond gains that, often enough, have exceeded 100% from their entry-price to their present asking-price.

That’s not too shabby for a boring, backwater like bonds and for those who know how to use the asset class effectively, not that I have anyone in particular in mind. :-) :-) :-)
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Hi Charlie -

How have bonds fared by comparison? Depending on which benchmark you use, bonds continue to gain in price, though quite modestly.

It was interesting to me to see the breakdowns among various bond subasset classes. Using the Monday close to Thursday close figures for some ETFs:

(from here - http://finance.yahoo.com/q/hp?s=AGG+Historical+Prices - just change the ticker in the box provided)


AGG (aggregate Treasury/agency/mostly high-quality corporate): 104.38 to 105.09 = +0.68%

TLT (long-term Treasury): 91.69 to 96.79 = +5.56%

MUB (munis): 103.94 to 103.94 = unchanged

LQD (investment-grade corporates): 106.89 to 104.80 = -1.96%

HYG (high-yield corporate): 88.75 to 84.49 = -4.80%


To your point, all of them beat the Dow and S&P.

But if stocks keep tanking and corporates do worse than Treasuries, perhaps those looking for another outstanding entry point to add to corporate bond positions will get their wish. :)

best,
dan
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Dan,

Thank you for taking my post and then going deeper with it by looking at a variety of bond-index proxies, not just the single broad one I used.

Now let's look beneath the hood a bit. The sub-classes with the least credit-risk did best, as would be expected. Those most exposed to credit-risk did the worst, as would be expected. But this is where being a buyer of individual bonds, rather than an indexer, might pay off. Though JNK has tanked hugely, my own holdings, a substantial portion of which are less than investment-grade, were barely affected. My day-over-day change for my E*Trade account, all of which are bonds, was a mere $8 on a $65,600 account, all of whose 54 holding (but two) were acquired between Feb 6, 2009 and April 28 of this year. Of those holdings (listed below by issuer), all but one are corporates, and most are "Industrials", (which is a group I strongly prefer for having real, underlying assets) rather than "Financials", and some are "Foreign" (giving me a bit of diversification that way).

I haven't done a break-down by credit-risk tranche, but I'm guessing that for this account (one of three in which I do active buying) the split between invest-grade an spec-grade is roughly 40:60. I know for sure in my IRA that this year's buying has been far different, and the ratio of invest-grade to spec-grade is roughly 75:25, because I was pursuing a different strategy, and of that invest-grade tranche, everyone of them is triple-AAA.

As to your point that some expected and minor price fluctuations might create buying opportunities for bond buyers, I seriously doubt it. As I wrote to a friend yesterday,

Bond prices are being hammered, but in two directions. The "safe" stuff is getting even more over-bought. (A week ago, the long bond tagged 5%. Now it's sub-4.7%.)

The financials, OTOH, are getting dumped. E.g., two days ago, Zion's yield-curve was headed toward 6.7% (down from last winter's 12%). Today, same issues are over 7%.

Goldman's bonds inched over 7% at the long end. BP's longest maturity went to 4.3 (from a previous 4.2). Transocean's issues remain unmoved (so far).

"Sell before May and go away" would have been excellent advice. I'm doing not much looking and no buying. Let the dust settle, and then I'll reassess where we're at. So writing book reviews keeps me out of trouble.


I could be wrong about prices and timing, of course. I frequently am, and I've been saying since last July that bonds were over-bought. But since then, I've added 76 new positions, 45 this year alone. But the shopping hasn't been easy, and it's now getting all but impossible. The "good stuff" really is overly-priced, and the junk isn't cheap enough. But that's the bond market, and you deal with it as it is, not as you'd like it to be.

Thanks again, Dan, for taking my post at face value and then building on it. Maybe some good discussions can happen in this forum after-all.

Charlie

"He that cannot abide a bad market deserves not a good one."
----------------

Am Rail
AMD
Anheuser
AOL
Arcelomittal
BAC
Banponce
Belo
CAF
Caterpillar
Columbia
Conoco
Cooper
E*Trade
Edison
Ford
FPL
GE Cap
Geico
Goodyear
Gulfmark
JA Solar
Kansas
Masco
Mead
Mueller
Navios
Norse
Oregon State
Pilgrims
Principal
Seagate
Sears
SLM
Smithfield
Sprint
Suntech
Terex
Trinity
Ultrapetrol
United Rentals
Zions

As Graham points out in his book, The Intelligent Investor, if a seemingly-risky asset can be bought at a substantial discount to its intrinsic value, then a margin of safety is created that removes a great deal of the seeming risk, just as when a seemingly-safe asset is bought at price far above its intrinsic value, great risk to the investor is created.

Value investing, folks. Value investing. Buy what should be bought, when it should be bought, at the price it should be bought, and in the amount it should be bought. That's the game. That's how you make money in bonds (or any other asset class). You buy smart, so you avoid a lot of trouble for yourself down the road, like now, when markets are blowing up, again.
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I addressed some of our bond holdings on http://boards.fool.com/Message.asp?mid=28496992

I didn't mention in that post that we still have some bonds acquired years ago that are still underwater (A BAC bond paying 5.45% maturing in 2028 down by a tad less than 6% and a GE 5.125% bond maturing in 2029 down 7.65%.* I have felt I need to get at least 5% on bonds.), but they two have been increasing and are now less than 6 and 8% underwater. Our 1.6% 10-yr TIPS is up by 20.28% and our 2% TIPS is up by 25.87%. We also have a large 5-yr tradeable CD paying 5% maturing in 2013 that is up 8.46% above maturity (and it pays interest monthly). I'm tempted to trade that in, but the 5% monthly income is still nice.

I have limited experience in bonds, but it seems to me that bonds generally follow stocks but by smaller amounts. That is when stocks are down, bonds are down too but not by as much. Therefore I am delighted that in this downdraft on stocks, bonds are up.

* In spite of what the market may say, 5+% on a corporate bond is about 1% above a 30-yr Treasury and seems good to me. I know there are people that are panicking and feel that both BAC and GE are going down the tubes. Sorry, but that is nonsense. BAC is too big to fail and GE has yet to have even a negative quarter in earnings.

brucedoe
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I have limited experience in bonds, but it seems to me that bonds generally follow stocks but by smaller amounts. That is when stocks are down, bonds are down too but not by as much. Therefore I am delighted that in this downdraft on stocks, bonds are up.

Bruce,

As Dan shrewdly points out, bonds are not up. Some sub-classes of bonds are up, and some sub-classes haven't been as badly hurt as stocks. You need to dig deeper.

I know there are people that are panicking and feel that both BAC and GE are going down the tubes. Sorry, but that is nonsense. BAC is too big to fail and GE has yet to have even a negative quarter in earnings.

Make your case with evidence, not by assertion. Did ever ever hear of a company called Lehman? Did you ever hear it said, before they failed, that they were "too big to fail"?

As for GE, that is a piece-of-trash company --that happens to make excellent turbines-- but is irresponsible run and could go down just easily as any other company. Yes, internally, they are scrambling to unravel the accounting scams they've been running to report those good quarterly earnings. But those earnings aren't real. Again, you need to dig deeper, instead of just hoping the bets you made on GE will pay off. Maybe they will, maybe they won't. If markets turn really ugly, anything could happen.

Charlie
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I note that a 5 day comparison chart for NQS and BLE show that prices drifted downward by 1-2%.

http://finance.yahoo.com/q/bc?t=5d&s=NQS&l=on&z=...

So generally there was a flight to quality issues. But no sign of panic selling.

Frankly I did the same thing with stocks after the market began to look weak early in the week. I decided which ones I was prepared to hold and took profits or sold weaker holdings.

European investors must be fleeing to dollar denominated investments. Treasuries must be their first choice. And what else? Blue chips (but not if P&G and MMM prove to be highly volatile)??
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GE has yet to have even a negative quarter in earnings.

Sadly, bruce, earnings are not an indicator of health in financial institutions. Money is fungible. The books that show earnings are kept separate from the value of the assets claimed on their books. So they can easily report earnings while having huge holes in their asset base. If forced to market to market, writing down worthless loan or mortage assets, they will take a major hit to earnings, and book value will similarly be reduced. Then the stock price will plummet.

In the world of finance, none of this is hard numbers. The numbers are soft and supported mostly by investor confidence in the future value of those assets.

I think it takes guts to hold these. But personally I have some of both of the ones that you mention. OK, with suitable returns, and as part of a diversified portfolio.
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Charlie

Well I feel that ALL corporate bonds are a gamble. In fact in over 50 yrs of "investing" I alway avoided corporate bonds until the last decade. So yes, I do not think that corporate bonds are anywhere near as safe as Treasuries.

I have sort of a rule that I will sell a stock that lowers its dividends. Yes, sometimes that is a good move for a company to make, but for a company like GE to break a 38 year record of increasing its dividends, I recognize it was not done casually so there must be some serious problems that they recognize. So I sold my GE common stock when they reduced the dividend (at a sizable loss, unfortunately). But I had also read that they may be forced to spin off GE Capital which worried me even more.

I'm afraid that your comments on GE sound rather emotional rather than rational to me. GE is far more than turbines. I'm even sorry they got rid of half of NBC. My favorite TV stations are MSNBC and CNBC (along with PBS and TCM). But they apparently felt they had a hard time making it work profitably. And they even have tried to get rid of their electric light bulb business which is where they got their start. We all know what happened to Westinghouse when they got rid of their light bulb business. You lose your identity with the public.

Corporations are not meant to be permanent institutions. When the reasons they were formed go away, they go away unless they reinvent themselves (like IBM and Corning have done). The second largest corporation in 1900 was U.S. Leather. They decided not to reinvent themselves so they went away. But light bulbs are different than leather. We still use them. Yes, I think there will have to be a very long-term transformation to compact fluorescent and LED lights, but that doesn't sound that hard. And there are lots and lots of people resisting this change.

brucedoe
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paul

I wish I was on the computer when PG went down 35%. I would have backed up the truck. However, someone said they tried to put in an order during this period and it went so quickly that they couldn't take advantage of it. Only the high frequency traders can take advantage of this sort of thing. It is made for them I guess. But it is a cautionary note for us peons. We are a side show trying to play with the BIG BOYS. Good luck.

brucedoe
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paul

I agree with you entirely. I wouldn't get involved in stocks except for the need to try to keep up with inflation.

Please note that that we have already had the BAC bond for 7 years and the GE bond for 6 years. The interest from these helped us during the bad times during the last decade. Our "safe" money is in CDs. Sadly our 6% and 6+% CDs are maturing and we are not going to be able to renew them at better than half the original rate. But are still getting the 5+% on the GE and BAC bonds.

My father was a CPA, and I know just enough about the theory of accounting to know that a company that is profitable in one theory of accounting may be losing money in another theory. This in fact happened to a company my father helped as a start up - Control Data. First they sold computers and booked the revenue, but, as time went on, gradually they didn't sell computers but leased them. Do you book the whole lease or do you prorate the revenue over the period of a lease? Well Control Data at the beginning of leasing just booked the whole lease and looked very profitable. When they converted to prorating revenue over the term of the lease, they went to steep loses. There are special terms for what I am talking about but I have long gone forgotten about them.

I also ran into this when I was working for pay. We had an open order to buy, say, up to five computers over the next five years. Our accounting department wanted us to come up with the whole sum the first year! There was no way we could do that. It was hard work to get them to let us just pay for the computers as we acquired them. We just didn't want to go through the bidding process five times and maybe lose some benefit of a bid for a group.

brucedoe
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I'm afraid that your comments on GE sound rather emotional rather than rational to me.

Bruce,

It isn't my comments about GE that should concern you, but the high price you paid for those bonds, and the fact you aren't achieving a real-rate of return (after taxes and inflation) on that so-called "investment."

I don't make those kinds of amateur mistakes.

Charlie
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Charlie

Its funny, but I was never bothered by my bonds until you decided to try to humiliate me (Wait, a predecessor before you by the name of junkman used to do the same thing. Are you junkman by a different name?). I do not trade bonds. I have no intension of selling them. There are those who are expecting raging inflation. Well, I have been expecting raging inflation since 2001. I have no idea why it isn't here. When I bought CDs paying 6%, I fully expected in a year to be buying CDs paying 7 or 8%. Well, instead of that interest rates have fallen alarmingly not increased and you can only get 3% on a 5 yr CD. I am not into bonds for capital gains (Wait, I did have this in mind in buying that 4.5% 30 yr Treasury as I thought the interest rate might go down to 3%, but I am willing to hold it even if that doesn't happen. Currently the rate is below 4.5%.). If trading bonds for capital gains is your objective, fine for you, but it is not my objective.

I have no idea when raging inflation will come. I fully expect it to come some time. But in the meantime, I think the problem is still deflation for the foreseeable future. And that is what seems to have happened.

I'm sorry that I bring out a sneery side of you, but this is my board as well as yours. I was here long before you came, and I'll probably be here long after you have gone on to better opportunities. I don't pretend to be a professional bond trader and have said so a number of times. I'm just a participant who got into corporate bonds in search of yield. If you don't like what I say, you could ignore it. Seems to me that is what you said to another poster.

brucedoe
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Charlie,

You stated earlier that you have around 45 positions in an account of just 65k. If you're actively trading in that account I find it hard to believe you're doing very well - the transaction costs for trading such small amounts of bonds are very substantial. I would reconsider your portfolio approach, you might do better simply buying a mutual fund as the costs would be substantially less and you could still maintain the right diversification within your bond portfolio.

Obviously you're confident in your bond picking abilities, so maybe leave half of your money in a discretionary account and trade with that. If you're really confident you can take far fewer positions and still make at least as much money without transaction costs crushing your returns.

The professionals love retail traders - they'll charge you points for every trade and make a killing. I know, I've done it.

Jon
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Bruce,

I didn't try to "humiliate" you.

You did that all by yourself in buying MSFT's 5.2's at a premium to par when the least bit of due diligence suggested it was a sucker's buy. You bought what you were shown, rather than what could be found at the time. If you want to be proud of that mistake, then be proud.

As to whose board this is, it isn't yours, it isn't mine, and it definitely isn't Lokcocus's (who seems to have departed).

What I do contribute to this board, besides some admittedly regrettably controversy, is a way of looking at bond-investing that comes from experience and can't be found in books. Read those reports, or ignore them as you choose.

Charlie
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Jon,

I don't trade bonds. In Cohen's terms, I "collect" them.

Charlie
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(Wait, a predecessor before you by the name of junkman used to do the same thing. Are you junkman by a different name?).


Charlie has to continually change his name because he annoys so many people unnecessarily and ends up in many ignore lists.

This is his 3rd ID in the last year or so.
User Name: charliebonds
Registered Fool Since February 17, 2009
Previous User Name(s): salsipuedes (4/18/10) junkman02 (1/1/10)

He can't handle anyone who disagrees with him.

Rich
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I don't trade bonds. In Cohen's terms, I "collect" them.

Charlie


That makes more sense then. Buying and selling is horribly inefficient in the bond market, particularly in retail sizes. Just buying and holding will cut the inefficiency in half!

I shouldn't complain about it though, it's provided a living for me for a while now :)

Jon
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Bruce,

I'm even sorry they got rid of half of NBC.

They didn't, they sold their majority interest, they are now the second largest stakeholder in NBC/Universal. I suspect that they will not be a silent partner and they no longer are responsible for managing the day to day business. Down the road they may sell off more.

If all goes according to plan, the next announcement will be of a Comcast acquisition. The cable giant is expected to merge its content assets with NBC Universal, including the cable channels G4, Versus and E!, and contribute as much as $6 billion in cash (the payment could be less if NBC's financial performance worsens by the time the deal actually closes), in return for a 51% stake in the combined company. It would gain a TV stable including broadcast network NBC and profitable cable channels USA, CNBC and Syfy, as well as theme parks, a film studio and an ownership stake in popular video site Hulu.

Within eight years, it's expected that GE would sell its 49% stake to Comcast, giving the latter complete ownership of the company and its assets. The purchase would be funded by the combined entity's cash flow and debt potential, and would be valued through a public market comparison of comparable businesses, according to published reports.


http://www.forbes.com/2009/11/30/ge-vivendi-comcast-business...

jack
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