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Hi,

See:
http://finance.yahoo.com/news/treasuries-u-10-yield-highest-...

I know very little about bonds in general or treasuries in particular. Always been a stock guy. But when I saw this about treasuries being over 3%, I thought maybe for my Mother?

Any thoughts would be appreciated. Notice at the end of the article the guy says "People are not going to set up new positions right now based on this number,"
Why not? 3% guaranteed safe isn't bad, eh?

Also, how does one go about buying these in the easiest manner?

Thanks,
Rick
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RB,

Notice at the end of the article the guy says "People are not going to set up new positions right now based on this number,"
Why not? 3% guaranteed safe isn't bad, eh?


Just a note that the 3% is guaranteed rate of interest or coupon the bond pays. The other guarantee is that you will get your investment principal back (assuming you buy the bond at face / par) in 10 years.

The only issue is that unlike a CD, you have no guarantee of what you can sell the bond for in the interim. If interest rates go up 2% next year, that 3% won't seem so good, but you'll be stuck with it because your bond will drop >10% in value to compensate new owners for the new higher interest rate paradigm.

In the case of a CD you can pay a fee to get your money out, but that is not the case in the bond market... the market sets the rates and you take or leave them.

Most brokers should be able to buy treasuries directly. Just call them and ask how and what they charge in commission and/or spread fee.

Ben
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you can buy treasuries at their site...I think its treasurydirect.gov. Intrest payments go right into your bank account.

However, you cannot sell treasuries on this site anymore.

To sell, you'd have to have the securities transferred to a broker accont, which can take a few weeks, and may require a signature guarantee.

So, If you're 99.9% sure you want to buy and hold, it might be the most economical for you to use treasurydirect. Otherwise, the small extra amount you pay at a brokerage account might be worth it to have some flexiblility.
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P.S.

In a broker account, you can also buy "zero" treasuries, which act like CD's...buy at a discount, get it all back at term. The yield is generally at least ten or 20 basis points more in yield. They are called STRIPS, I think.

I don't know if you can buy these in treasurydirect.

If you would need the interest payment for income, that would probably not be of interest to you.
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Thanks guys, those thoughts and info help a lot.
RB
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If it were me, I would go buy a 5 year 3% CD at www.penfed.org instead.
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BenHacker,

You wrote, The only issue is that unlike a CD, you have no guarantee of what you can sell the bond for in the interim. If interest rates go up 2% next year, that 3% won't seem so good, but you'll be stuck with it because your bond will drop >10% in value to compensate new owners for the new higher interest rate paradigm.

In the case of a CD you can pay a fee to get your money out, but that is not the case in the bond market... the market sets the rates and you take or leave them.


Just to complicate things, let me point out that brokered CDs DO work exactly like bonds and Treasuries. What you are referencing are typical bank CDs that are bought directly; but if you buy a CD through your broker, it's typically a brokered CD and the price on those do tend to fluctuate based on interest rates.

BTW, found any new undervalued investments lately? ;-)

- Joel
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Hey Joel, long time since we've chatted!

Just to complicate things, let me point out that brokered CDs DO work exactly like bonds and Treasuries. What you are referencing are typical bank CDs that are bought directly; but if you buy a CD through your broker, it's typically a brokered CD and the price on those do tend to fluctuate based on interest rates.

Great distinction, thanks.

BTW, found any new undervalued investments lately? ;-)

Sadly, not a lot.

I still like Sears bonds and still own a fairly large stake there adn am a buyer (both in SSRAP, which I can not longer trade at my current broker, and also the Dealer/OTC SRAC bonds).

I made a post last year on the DM board which summed up my portfolio... it's not terribly different from that this year but with less exposure overall. (http://boards.fool.com/your-top-3-5-ideaspositions-30459073....)

A few things that are new that I'm looking into:

1) ESV - Ensco PLC - They are an offshore drilling services company. Trades for about book (but there is goodwill in there) and maybe 7-10x earnings depending on what you believe normal earnings are. And they payout roughly 50%. They don't have a lot of insider ownership and the long time CEO is changing - both of which are causing me to hesitate.

2) MIL - MFC Industrial - Hard to explain here. Basically one of Michael Smith's entities dealing in commodity trading / banking, but I'm still not comfortable investing along side Michael Smith as he has used outside shareholders in the past. However, the business seems cheap, and I'm trying to look anew at this in the spirit of overcoming past biases. We'll see. I also have a nostalgic connection since he picked up the Compton Petroleum assets in a fire sale and Compton was one of my biggest losses. :)

3) AIG - Subsequent to the post above, I did buy a decent stake in AIG warrants. They've moved up a bit, but they still offer a long term, below book strike on AIG which I think will prove to be very valuable as the ship is righted slowly and the market stigma and valuation discount are reduced.

4) SHOS - Another one I've taken a stake in. Seems like a pretty decent business that was spun off of SHLD. I think there is a long term growth story here but it probably carries many of the stigma's of SHLD. Trades at book, big insider ownership. Stock is cheap due to SHLD connection, uncertainties about ESL's winding down and business relationship with SHLD (if one will be favored over the other).

5) Tax Loss Ideas - Not generally an area I play in, but I think low coupon preferred (especially those issued this year) have been hit unusually hard. GGN-PB is one example of a basically AAA perpetual credit trading at a 6.5% current yield. Seems boring, but there is some capital appreciation possibility, and those looking for (very) safe income should look here. Other things that may be aren't great long term, but probably good for a bounce (did I just say that?) are things that were shalacked broadly this year - GDX as a broad category for instance.

--

Bottom line is that I don't have a ton of great (new) ideas, but I keep uncovering a few special situations and generally my portfolio is more conservatively positioned than it has been in a long time. I like a lot of my holdings, but I have some decent sized hedges as well now that performed poorly in '13, but I think should do better looking forward (don't I hope).

Any ideas on your side?

Ben
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I have lately started buying Ultra Petroleum, UPL. This is the predominately a natural gas company with some debt on the balance sheet, but not wildly excessive amounts, IMO. Their main producing areas are conventional gas deposits (with some shale plays), which means they have the lowest all-in costs of any of the large, public gas players. Gas prices have been moving up as storage withdrawals have driven inventories way down and most of the guys who were out drilling new wells hell-for-leather have pulled back a lot on drilling activity. Since the shale wells that have driven a lot of the supply expansion have steep production curve declines over relatively short periods, I don't see a lot of new supply coming aside from gas that is incidentally produced from oil drilling activity. The gas price increase over $4 removes default risk from UPL and the company's improved prospects don't seem to be reflected in the share price. I think that in the next 5 years we will see notably higher gas prices, but at $4.XX gas UPL still looks cheap to me.
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But there is no income for the investor here.
Maybe a play for the value board people?

Chuck
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But there is no income for the investor here.
Maybe a play for the value board people?

Chuck

****************************

In my experience, cash from capital gains spends just as well as any other cash.

Seriously, I don't see much value in the stuff that yield hogs traditionally chase. Junk is at extremely foolishly small spreads and weak covenants. High quality stuff (treasuries, investment grade corporates, etc.) are getting hurt by a rising rate environment. There is a large herd of not so bright people driving down yields on dividend stocks. Preferreds are in rather thin air. The only bright spots for income look like a select few closed end funds, but you have to be very careful and selective. And there are the market-leading pen fed 3% 5 year CDs for a few more days. That is about it, so I am fishing in other ponds to the extent I bait a hook at all. I recently bough some emerging market stocks via ETF because they look relatively cheap and I needed to increase my allocation. No an income play.
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Brewer, how about container shippers DCIX and TEU? (even though div cuts are probably coming)
Containers are the last of the shippers still beaten down!!

I agree with Ben about MIL (MFC industries)... over 3% yield and they bought (stole) Compton assets for next to nothing at the bottom of NG cycle.
I added Friday after the proxy fight agreement... I think/hope Smith & Kellogg's styles will compliment each other.

And then there is PWE (over 6% yield) for those that like to go year-end tax loss bottom fishing.

Still lots of speculative tax-loss stuff out there with reasonable yields.
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I do not follow the container sector for a variety of reasons, but one of them is that containers are weird. Hugely dependent on consumer goods demand (not a plus IMO) and relatively concentrated in terms of who the major lines that charter these things are. There might be value in the sector, but I haven't followed it enough to really have an opinion.

I sold most of my long-held NM position into the recent crazy strength, now holding only a token piece. The most obvious value I see in shipping is NNA, which is currently my largest position.
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Brewer,

Thanks for your honest opinion about the containers. I respect opinions from others that” know what they don’t know”.

Congratulations on your NM call and profitable trade/investment. I also should thank you for getting me into A.F’s stock world.

I first bought NM as an income stock more than 3 years ago. As I continued to follow AF’s cc’s and other shippers, I gradually averaged down and started buying NNA as well. I remember thinking (as prices dropped), “this is crazy, I better stop buying”, but then I remembered John Templeton’s famous quote:

if you wait until your through the tunnel and out into the sunshine, you’ll have to pay a premium price… if you even wait until you can see the light at the end of the tunnel, you have already past the best bargain days.

So I held my nose and continued to average down. I remember listening to one cc (not AF), where the CEO said we don’t worry about NAV’s because when the market turns, asset prices and charter rates will rise quickly. We only worry about being able to maintain our cash flow until the turn. That quote and Templeton’s quote stuck in my mind... so I felt more comfortable holding and adding. First NNA turned (clean tankers), then NM (bulkers), so I added to my still depressed other tankers (TNP, TNK). Now that all tankers and bulkers have moved, I’ve been buying/adding some containers.

I believe in letting my winners ride, so I haven’t taken any profits yet. I’m sort of waiting for AF to sell (raise cash on a secondary at high NM price). But I really should begin scaling out at these bubbly prices (like you).

I feel MIL is sort of like where NM was a few years back. I’ve had a full positions for a while, but I keep adding. And sometimes this averaging down (in the tunnel) can backfire, so the key for me is diversification.

Here’s hoping the bull run continues in 2014 and I don’t have to practice another famous Templeton quote:

Nobody has been able to predict recessions reliably, so the best thing to do is to buy when shares are thoroughly depressed [during recession] and that means when other people are selling.

Howard
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Preferreds are in rather thin air.

How so? AFSI-A, inexplicably depressed after a recent Seeking Alpha short's attack against AFSI, trades at 18.27 (with a par of 25, so you don't need to worry about being called;-) with a yield on cost of of 9.24% _as a qualified dividend_ (nicer for tax purposes than dividends paid by REIT preferred, which are treated as ordinary income;-).

I don't call this "rather thin air" (and indeed I accumulated a nice chunk, doubling down on the due diligence which convinced me to keep my AFSI common and indeed extend my exposure a bit as it crashed from the short's attack).

And, it's just one of several `distressed` preferred stocks you can currently get bargains on (although, IMHO, perhaps the single best one of those bargains)...
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Howard:

In some ways, it killed me to sell off my NM. I greatly respect AF and her team and I think they are on the right track with NSALI. OTOH, I have made a ton of money along side AF and as an investor in the bonds issued by her companies, so much so that I am semi retiring next month at the age of 40. NM had become a huge position so it was time to sell down and diversify. I still have a large position in NNA, but I am prepared to let some go if it gets up to 5 and will keep lightening up should it continue rising beyond that level. Safety first!

You did well jumping into this sector (with judiciously chosen operators) when the market would not give them the time of day. Sometimes I think investing requires more in the way of intestinal fortitude than brains.

For me, the bar is now higher before I will commit capital to an individual security. I need diversification more than I need to hit it out of the park, and the markets have run so much that there is likely still money to be made, but it is no longer the fat pitch we had a few years ago.
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aleax, if an issuer is effectively shut off from capital market access in one of the least discriminating markets I have seen in years, you ad better be damn sure of your analysis. Good luck.
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I am semi retiring next month at the age of 40

Brewer,

Congratulations on your successful accomplishment at such an early age.

It makes sense to take larger risks and swing for the fences when one has limited capital and time (age) on your side to recover from any setbacks. But now that you have accomplished your semi-retirement goal, there is very little benefit to a concentrated portfolio.

I've always found that large positions have created tax problems for me. Many of my core equity holdings are held in taxable accounts (because of the preferential dividend taxation policy), so I view capital gains as something I must try to manage. Sometimes, like in the case of takeovers or going private, I’m given NO choice and I’m forced to cash out and pay the taxman. So I try and hang on to my winners in taxable accounts. I assume a chunk of your NM gains were tax deferred.

Surprisingly, since I began practicing diversification, my results have improved considerably. Many stocks that start out as low PE income stocks, turn out to be big winners over the years. I now have the patience of waiting years for management to grow the company.

Howard
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BenHacker,

You wrote, Hey Joel, long time since we've chatted!

...

Any ideas on your side?


Not much new, really. My new job makes finding time to research investment ideas a little difficult. That and I've been a little discouraged that what I see can do that much better than the market in general.

I've put most of the money from income and called securities from 2013 into broad index funds. I'm also still holding a bunch of cash. The cash and bond / preferred positions have actually been holding back my portfolio from meeting/beating the stock market averages; but its comforting to see those regular interest and dividend payments from my fixed-income investments.

I also took a stake early in '13 in QCOM (tech common), ARMH (tech common) and NLY-D (REIT preferred). I added to a position in PMT (REIT common) and have been thinking about researching NLY again with an eye to the common (or to closing the preferred position since the common's yield is almost too good).

I've also joined an investment club (talked into it by coworkers). They/we have one investment I keep wanting to go back and review for my own portfolio - CTSH. It's done outstandingly well in 2013, so I've become concerned that it might be ahead of itself now. Even so, it seems like a good issue to follow and might be worth taking a stake on a pull-back. The one problem is that it's kind of a tech play too...

As for the QCOM & ARMH purchases ... I normally try to avoid purchasing much tech because I've been burned by it in the past because I tend to see the promise of the tech and have a hard time seeing the bigger picture. However I've been working in fields where these two are dominate suppliers for quite a while now and I don't see anyone that can really challenge them anymore so I felt I had to take some kind of position when the opportunity presented.

Broad index funds are once again my largest holdings followed by a small collection of preferreds. I also have some core LTBH stock holdings in stuff like CVX, VZ, PFE & GIS. (I also have a few smaller issues.) I'm still holding onto 3 bond issues, all trading above par but only 11 bonds in total, so they're just a small niche in the portfolio now. I'm also still about 10% cash. I don't have any option positions or other defensive hedges outstanding, nor do I really think we're on the verge of any major collapse though I don't think anything has really been done to prevent a repeat of the last one. But then I really didn't call the last one either - I just took advantage of it after it was obvious.

I'd like to retire around the end of the decade. I think I just need to double my portfolio one more time. I'm kind of hoping to see another crash between now and then. Those seem to bring lots of opportunities. Between them, my investments are likely to become increasingly boring in an effort to participate in some gains without taking on too much risk.

- Joel
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Thanks Joel.

Not much new, really. My new job makes finding time to research investment ideas a little difficult. That and I've been a little discouraged that what I see can do that much better than the market in general.

That's natural I think. This (beating the market) is frankly pretty difficult to do. Since I've been doing my RIA biz + a full time job for 7 years I can definitely relate. I think broad indexing can make a ton of sense and simplify your life a lot for the vast majority of people as long as you have a plan and stick to it and save strongly.

I also took a stake early in '13 in QCOM (tech common), ARMH (tech common) and NLY-D (REIT preferred).

mREITs scare me in general but I have owned some aspects of them off and on over the years. I feel the same way about tech as you do. I've owned small stakes in MSFT / NOK / AMZN in the past and a bigger stake in GOOG (sold a few years ago around $650... whoops). Just can't get into it given the change even though I work directly in the fray with a lot of these guys.

I added to a position in PMT (REIT common) and have been thinking about researching NLY again with an eye to the common (or to closing the preferred position since the common's yield is almost too good).

Care to give me an elevator pitch on PMT? My 2 cents on NLY is that after Mike F passed the company is in a dangerous place... he was really the glue and I am not sure I would make a bet that new problems won't creep in that only he would have been able to see. They are an absolute giant now... I'd be very wary personally. I have no great in depth knowledge but I do focus on financial companies a lot, and high level + great reputation under old management + new management is dangerous IMO.

I've also joined an investment club (talked into it by coworkers). They/we have one investment I keep wanting to go back and review for my own portfolio - CTSH. It's done outstandingly well in 2013, so I've become concerned that it might be ahead of itself now. Even so, it seems like a good issue to follow and might be worth taking a stake on a pull-back. The one problem is that it's kind of a tech play too...

My investment club will be celebrating 10 years in May... it's been fun but a little bit of a logistical pain at times. We are all fairly ideologically aligned though which helps. Never heard of CTSH, thanks for the heads up...

As for the QCOM & ARMH purchases ...

...Broad index funds are once again my largest holdings followed by a small collection of preferreds.

...I'd like to retire around the end of the decade. I think I just need to double my portfolio one more time. I'm kind of hoping to see another crash between now and then. Those seem to bring lots of opportunities. Between them, my investments are likely to become increasingly boring in an effort to participate in some gains without taking on too much risk.


Good luck on your retirement goal. If you are still adding some funds, I think doubling in 6 years is possible... but may be a stretch. Keep at it though, nice to be so close to meeting such a big goal!

If we don't see you around these parts much anymore I'll assume it's because you are making what you need on your road to retirement... we don't all need to try to beat the market.

Ben
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BenHacker,

You wrote, Care to give me an elevator pitch on PMT?

PennyMac (PMT) is a REIT founded by a handful of ex-Countrywide Loan execs. Its essentially a play on junk mortgages. This REIT was originally founded with the idea of buying distressed mortgages from banks that are desperate to get them off their books, preferably at a deep discount and either rehabbing them or repossessing the properties securing them.

These days they also originate some new loans and buy some correspondent lending loans, though some banks are still divesting. Correspondent lending is basically wholesale lending through mortgage brokers. Banks quit dealing in correspondent lending after the credit crisis, so PMT has made a business of going places banks now fear.

With that said, I think PMT will start seeing some difficulty maintaining its margins. Right now it pays a yield of about 10%. But I could see that going down in a few years and that will likely result in a contraction its share price. But right now I think its still a cash cow, even if you might have missed some of its best years.

Also, Never heard of CTSH, thanks for the heads up...

CTSH is an old spin-off of Dun and Bradstreet. It's an outsourcing firm that supplies talent, largely from India. As the saying goes, If you can't beat them...

And, Good luck on your retirement goal. If you are still adding some funds, I think doubling in 6 years is possible...

Still adding and at a significant clip. I could be retired in 5. Worse-case is 8, I think. Doubling should happen in no more than 10 years even if I didn't add a dime; but I'm still contributing quite a bit.

Finally, If we don't see you around these parts much anymore I'll assume it's because you are making what you need on your road to retirement... we don't all need to try to beat the market.

I'll still be around. But I'm not going to be doing much in fixed income unless we have another crisis and I think there are good opportunities here worth my time... Else I've retired and I've got nothing better to do...

- Joel
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I added to a position in PMT (REIT common) and have been thinking about researching NLY again with an eye to the common (or to closing the preferred position since the common's yield is almost too good).

Care to give me an elevator pitch on PMT? My 2 cents on NLY is that after Mike F passed the company is in a dangerous place... he was really the glue and I am not sure I would make a bet that new problems won't creep in that only he would have been able to see. They are an absolute giant now... I'd be very wary personally. I have no great in depth knowledge but I do focus on financial companies a lot, and high level + great reputation under old management + new management is dangerous IMO.


Me, I don't see any of NLY's preferred stocks as being at all appetizing at this time. The yield on the common looks crazy high just because its stock price has _already_ crashed in 2013 -- from highs above 16 (in the spring before the word `taper` was first uttered;-), down to lows below 10 (now recovered to 10.24).

But management has been doing the right things to keep the firm solid for the future -- reducing payouts (steadily down: .45, .40, .35, and now .30, over 4 quarters), which of course is part of what crashed the stock price, but also already enabled a substantial reduction in leverage and some diversification from residential mortgages to steadier commercial ones. I like what I see there (and posted about it in two free TMF boards - the NLY-specific one, and the general one on REITs).

Equity REITs (esp. triple-nets, I think) are of course steadier and safer than mortgage REITs, but in a well-diversified balanced portfolio I think there's space for both kinds (as well as some more specialized REITs like, say, PCL and AMT). In 2014, I aim to increase my REIT exposure target, from about 5%, to about 10% of my securities.

I'm also slowly changing my asset class balance, which was 75/25 between equities and debentures in early 2013 and for years before -- it's now 70/30 and on its way to 65/35. This includes REITs -- I count as `equities` the common stock of equity REITs, as `debentures` all preferred stocks and common stock of mortgage REITs.

As I mentioned in another post here earlier today, Barron's sees REITs as one of their three best income investments for 2014 (they didn't in 2013, and were proven right) -- #3, with #2 being municipal bonds.

I had reached the same conclusion, and started re-positioning my portfolio accordingly, a bit earlier than that, but it's always nice when one sees professionals agreeing (plays to one's confirmation bias, I guess;-)...
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