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Suntech’s converts come due next month on 03/15/2013. If they were going to mature, they’d be trading closer to par. But they aren’t, as the linked chart shows.

The stock for Suntech is doing better than the two ETFs for the solar energy industry, TAN and KWT. But I’m not too encouraged by that. Who knows what’s really going on behind the scenes? My guess is that bond holders will be contacted shortly and be asked to roll their old debt into new debt. Obviously, I’m long the bond and wondering what to do. Here’s the schedule of how I got into the bond.

Qty Traded Price Amt P/L
1 04/08/10 84.000 $840 -41%
1 06/20/11 88.095 $881 -44%
3 02/01/12 66.365 $1,991 -25%
1 04/27/12 71.000 $710 -30%
6 $4,422

The trade on 04/10 was my opening position. I was “dipping a toe”. Prices traded flat for year, so I felt encouraged enough to add another bond on 06/11 at 84. Then prices rolled over, then seemed to recover, and I averaged down and added three at 66. That seemed to have been the correct move, and two months later, as prices continued to recover, I added another bond at 71. Now, of course, that whole play book is in shambles, and the bond is trading around 50, creating losses across the board.

The total position is tiny, just 0.6% of AUM. So I can afford to lose it. But I’d rather not, obviously. Money is money, and if the bond-holders get made whole, I’ll make decent money. But I really expect the bond will go into technical default and that we’ll be asked to roll into new debt, which I’ll do. Likely, we'll be asked to take a haircut of about two-bits on the dollar, though traders --from their bidding-- are thinking the haircut will be closer to four-bits, meaning, my loss would be about 25 points per bond, but probably no more than (-$1,500) for the total position and, hence, tolerable.

In a nutshell, that is the bond game. If you want upside, you've gotta risk downside. Elsewhere in the portfolio, on situations that were no more risky, I've already more than made up those losses. So bond-investing is a probabilities game no different than pulling marbles out of an urn, each of which offers a different reward or penalty. If the game has a positive-expectancy, you'll win over the long haul *provided* you keep betting *and* never over-bet your hand. That's what's hard to do, to keep buying, year after year. But if you don't take the trades your system tells you have to be taken, you're just gambling, not investing.

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