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This asset is sitting on a family member's Vanguard account and they are asking for advice. The line item is:

"DEB 5.95 PFD callable 2/28/08 @ 25.00 MTY 2/23/2103".

A value of $8.00 is shown on the hardcopy. Cost was about $14.00.

A Vanguard rep said they can be sold and have traded as high as $10.00. He had no idea what they would fetch on the market today.

AMBAC seems to be emerging from Chapter 11. They had a good Q3 and have approval from the bankruptcy judge. However, their bankruptcy proposal contains a significant haircut for creditors:

"Its restructuring plan allows for recoveries of between 11.4 and 17.6 cents on the dollar for holders of $1.25 billion in senior notes, and between 8.5 and 13.2 cents on the dollar for general unsecured claimholders, according to court papers.

Those groups, along with holders of $444.2 million in subordinated notes, could also stand to receive stock and warrants."

http://www.reuters.com/article/2012/03/14/ambac-confirmation...

How could these notes have sold for more than 17 cents on the dollar? Would you try to sell now if you can get $8 or just wait?

Other news sources have indicated the possibility of getting equity in addition to the partial recovery for creditors.

Thanks for any ideas or pointers.
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If the money is needed immediately, then sell for whatever is offered. Otherwise, wait 'em out in an effort to enhance realized value.

The situation is this. Someone created a speculative potion for themselves by buying a distressed security at what seemed to have been an attractive discount, i.e., $14 for a $25 stock. They were betting that the stock wouldn't blow up. Well, they lost the bet, and the stock did blow up. So now they have a salvage operation on their hands.

If the position is tiny --as it should have-- in terms of AUM, then whatever happens won't matter. The likely losses were anticipated (or should have been anticipated), and they are being more than offset by other positions in the account. In other words, "you win some; you lose some". That how investing works.

If the position were mine, I'd wait 'em out, and then dispose of the stock/warrants when they were received, and move on.
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bluepost22,

You wrote, This asset is sitting on a family member's Vanguard account and they are asking for advice. The line item is:

"DEB 5.95 PFD callable 2/28/08 @ 25.00 MTY 2/23/2103".

A value of $8.00 is shown on the hardcopy. Cost was about $14.00.

A Vanguard rep said they can be sold and have traded as high as $10.00. He had no idea what they would fetch on the market today.

AMBAC seems to be emerging from Chapter 11. They had a good Q3 and have approval from the bankruptcy judge. However, their bankruptcy proposal contains a significant haircut for creditors:

"Its restructuring plan allows for recoveries of between 11.4 and 17.6 cents on the dollar for holders of $1.25 billion in senior notes, and between 8.5 and 13.2 cents on the dollar for general unsecured claimholders, according to court papers.


I assume this is the ETD symbol AKF? QuantumOnline lists this symbol as suspended - obviously over the BK filing. Perversely TD Ameritrade and Fidelity don't quote the symbol. (Fidelity lists it in its symbol search; but won't quote it.) Since the par value of the issue is $25/share and if the work-out appears to be worth at most 17.6% of par (or $4.4/share), I would tell the broker to try to sell now - especially if he can get $8/share.

I've not read all the relevant material; but a quick scan tells me that these are senior unsecured exchange-traded debentures, which makes your family member part of the senior unsecured creditors of Ambac. At least they hadn't purchased a preferred issued. Often preferred shareholders are completely wiped out in BK.

Even so it seems unlikely there is any scenario where this issue is suddenly going to more than double in value overnight, even assuming Ambac comes out of BK sooner rather than later. That alone would convince me to be happy I could recover $8/share.

- Joel
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Joel,

Kudos to you for the thoughtful post on AKF. Now comes a tiny disagreement from me.

You advice selling *if* a price of $8 could be obtained. But take a look at a chart of where AKF is now trading. http://www.advfn.com/nyse/StockChart.asp?stockchart=AKF There are no bids, and the last reported price (nearly two years ago) was $4.22. Without an active market, the owners of AKF will have to discount their position if they want to dispose of it. This is the reason I'd advise them to sit tight and to let the BK work itself out. They are far more likely to realize a higher value.

The lowermost chart chart on the linked page is instructive. It can be assumed that AKF came to market in 2003 at a price pretty close to $25. By Jan, 2007 (the left-most edge of the chart) the price had fallen to about $18. It climbed a bit in a dead cat bounce back up to $20 and then fell to $15, setting up the first leg of a measured move. In other words, an observer's expectation at that point should have been that prices would fall to $10. Instead, they fell further, but they did retrace to $10, a fractal move that set up a second measured move that did play out exactly as it should have with prices tagging $5, whereupon it began trading sideways in the $7.50-$5 range.

OK, now step back and think about what the buyer(s) did. From a price chart alone, it is obvious that they tried to catch "a falling knife", but they had no exit plan in place in case they were proved wrong. In other words, they committed the very amateur mistake of trying to buy into a Stage Four stock and --worse-- they failed to trail a stop.

Again, look at the chart. We know the entry-price was $14. Therefore, we know the buyer(s) were making a bet that they knew better than their counter-party to the trade that the price was wrong. However, they failed is allow for the possibility that it was them who were wrong, and they had no exit plan.

For reasons that are beyond me to understand, using stops is a controversial topic in many of TMF's forums. But using a hard stop would have gotten them out of their buying mistake while the damage was still tolerable. O'Neil suggests 8% as a good rule of thumb. But let's give the stock "wiggle room" and say 20%. With an entry at $14, a hard stop would have been set at $11.20, or a loss of roughly $3 per share instead of the $6 loss per share they are now hoping to settle for that will probably be closer to a loss of $10 per share if they try to sell in a market without active bids.

Again, step back and look at the larger picture. Nobody buys perfectly. Nobody sells perfectly. It just doesn't happen. Mistakes and misjudgements get made. Mistakes and misjudgments have to be expected, *and* they have to be managed *before* they become expensive and painful. As simple a thing as setting a stop would have avoided the troubles the buyer(s) now find themselves in.

Charlie
------------------
"Amateurs look first to their upsides. Pros look first to their downsides."
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Joel and Charlie, thanks for your time and comments.

The investor was attracted by the dividend but didn't follow the issue closely enough as we went through the crash.

Thanks for the advfn.com link. I think the $8.00 value showing on the Vanguard statement is some kind of system artifact, and the $10.00 mentioned by the Vanguard broker is just wrong. I think she will put it on the market at $8 and if no takers just wait for "enhanced value". Interesting how a system artifact can become the new emotional stop loss price.

BTW, I was having trouble with the pricing shown on the advfn link:

http://www.advfn.com/nyse/StockChart.asp?stockchart=AKF

On the time scale it looks like the 2010 tickmark is the end of 2010, not Jan 1? Is this some perverse UK convention for graphing?
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globalist2013,

You wrote, Kudos to you for the thoughtful post on AKF. Now comes a tiny disagreement from me.

You advice selling *if* a price of $8 could be obtained. ...


Yeah. I was kind of assuming they wouldn't be novice enough to sell an liquidity security at market.

My post kind of implies that getting $8 would be a good deal at this point. Obviously getting $4 isn't, since they should be able to recover that much after the work-out. So yes, price does matter. Duh.

BTW, I agree that stops aren't bad. It's just that they're not the insurance policy some people seem to believe. The problems are two-fold. A simple trailing stop, converts to a market order and you (and everyone else) may wind up getting the absolute lowest price - especially if the news happens overnight and your trade executes at the open. Stop limit orders might be viewed as better; but in that case you might wind up holding the issue as it declines further. So I think TMF would argue that you should set an alert so you're warned and then look at the news and subsequent price action to determine if you should sell with a market or a limit ... or just hold. The point being to make an informed decision to sell, not a knee-jerk one. At least that's my take on it.

As for my personal view, I think stop limit orders are fine if you are holding large, liquid issues. Using them on illiquid issues is probably a recipe for big losses. And like most ETDs, I'd certainly have considered AKF an illiquid issue even before the BK.

- Joel
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bluepost22,

You wrote, Interesting how a system artifact can become the new emotional stop loss price.

Actually I'd argue that any price over the projected BK recovery price range is a pretty good price. So I would probably accept less than $5/share if it were me just so I recover the principal sooner rather than later.

In fact if you think the BK could drag out, you could make an argument for accepting less than the $4.40/share I mentioned. Remember, $4.40 was the upper limit. The issue might be worth as little as $2.85, so there is certainly a case to be made for accepting a price as low as that if you have a better use for the money today or if you fear these estimates are overly optimistic.

- Joel
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Joel,

I totally agree with you that most of the time it's far better both financially and emotionally to take the loss and move on. Doing so frees up capital and clears the head. But in the case of AKF, there isn't a ready market, and the price will have to be discounted far below the probable workout range of 8.5 to 13.3 cents.

With my own positions, I've watched this movie before. The company files Ch 11 on me, and I'm stuck with dead assets. Sometimes, I've been made whole, as in, a full return of principal and every penny of accrued interest. In other cases, I heard not a word from anyone, and all my money disappeared. Most often, however, there is some type of workout, a settlement in cash and/or new debt and/or stock and/or warrants. In some cases, I was able to flip the workout for a profit , e.g., K-Mart's BK, so much so I came out ahead on the whole trade. Most of the time, however, I've taken a beating, and I expected to take a beating if the position failed. But that's also why I buy small and wide.

Yeah, setting good stops isn't easy, nor is it non-problematic. But identifying one's exit point before a position is put on is a whole lot easier than trying to unravel the mess that comes from not setting them at the getgo, and their essence is this: "At what price point do I admit I was wrong and take corrective action?"

If an investor can't identify that price *before* the position is put on, why are they going to be able to identify it once money is committed to the trade and the emotions have kicked in? To paraphrase a football coach, "Risk-management isn't everything. It is the only thing." Explicit, trailing hard stops that convert to market orders is one way to express that risk-management. However imperfect they might be, they are a whole lot better tool than whatever most investors are using, which is the lame, futile hope that "prices will come back, allowing me to get out even."

Charlie
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So these notes got put on the market asking $8.00 and sold for $7.90.

There is a big gap between $7.90 and the press statements regarding likely recovery. Thus motivated, I went back to the claims administrator site and spent another 15 mins reading the latest proposal which seems to offer only equity to Senior Noteholders. Couldn't find the exhibit on warrants. Somebody has valued these notes at about $8 and when I get done with other end of year accounting chores maybe I can figure out why.

http://www.kccllc.net/ambac

4th proposal (there is a notice of a 5th but don't see it):

http://www.kccllc.net/documents/1015973/10159731203090000000...
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