WASHINGTON, July 12, 2013 – Short column today as we’re headed for roughly a 10-day working holiday primarily in our old home state of Ohio as well as in the wilds of Michigan which has considerably more working for it than just nearly bankrupt Detroit. We’ll eventually land in the Traverse City-Petoskey area which we’ve enjoyed visiting for many a year. Aside from an occasional column, we’ll mostly be on hiatus until we return on July 24.
As far as Wall Street action is concerned, we don’t really expect much today. The market is relatively flat as we write this around 10 a.m. EDT. That’s not surprising as this week’s big bull moves, likely aided and abetted by the Fed’s declaration of more dovishness (i.e., QE) and some big short squeezes, has gotten the averages short term overbought and in need of at least a rest if not another brief down leg.
We’d been battening down the hatches until this week as it seemed the Fed was about to let interest rates start moving up. The bond market got way out in front of this notion during the month of June, clobbering not only the Maven’s bond portfolio but everyone else’s as well, a nasty and unexpected hit, at least in this time frame.
Bonds are recovering somewhat now, but likely won’t hit their recent highs again. Ben Bernanke’s soothing comments after Wednesday’s close softened the “taper tantrum” somewhat. But it’s clear now that sometime in the relatively near term—this September, next year, or 2015 at the latest—interest rates will be heading back up to more normal levels.
For that reason, many folks who’d dumped at least some of their bonds are likely to allow them to stay dumped and not purchase many more, or at least not any more in excess of, say, a 5-year maturity. We’ll hold ours for now. Most of them are B grade or higher, including a couple of AAs, so our quality ranges from mildly junky to investment grade.
That said, we bought nearly all of them at huge discounts from face value on almost the exact day in March 2009 when all markets hit their historic recent bottoms. Consequently, several of these bonds have gone super-premium since then, price wise. To explain: a bond is initially issued (generally) at face value; that is, at a price of $1,000 per bond, with minimum purchases of at least five bonds usually required, although dealers prefer you to pony up for $25,000 of face value to get the best prices. (Our image above refers to U.S. Savings Bonds, BTW, which are priced somewhat differently, although the bond math ends up much the same.)
But as we all know, interest rates gyrate. Once a bond is issued, its price will always fluctuate with interest rates as well, pricing downward (below par) if interest rates go up and upward (above par or “premium”) if interest rates go down. For that reason, the extraordinarily bearish 2009 action in the bond market was virtually an anomaly. Interest rates had begun to plunge, but so, uncharacteristically, did bond prices. That’s because, as you may recall, we were all going to die in 2009.
As Warren Buffett has often said, the very best time to buy any investment is when there’s blood running in the streets. And the blood was running in the spring of 2009 as half-decent to very decent bonds were priced, at times, as low as 30 cents on the dollar, an astonishing collapse. And so, in utter terror and, as stock traders, normally not fond of bonds at all, we dove in, big time.
Of the large inventory of bonds the Maven required, he only bailed out of two of them for a loss—a pair of quite-adequately protected Ohio tobacco bond issues that started weakening again when that entire genre of bond started falling into ill repute.
One other bond—an Ambac debenture—eventually defaulted as that company went bankrupt, sitting there at about 25 cents on the dollar for years, until a miracle occurred; namely, the settlement with creditors and exit from bankruptcy that happened for Ambac earlier this year. Technically, bondholders were wiped out on this one and, further, didn’t collect any interest when the bonds defaulted.
But happy days! As senior creditors, bond holders like the Maven ultimately traded their worthless bonds for shares of stock in the newly re-created, non-bankrupt company (new symbol: AMBC). We traded our stock out at the beginning of the June correction, netting a colossal 65 percent return on the whole transaction, subtracting the price we initially paid for the bonds from the amount we ultimately received from the stock sale. An amazing conclusion.
Meanwhile, while all our other bonds have lost us considerable paper profits in the last month, they’re still way above what we paid for them anyway. They continue to generate effective interest of around 8-10 percent (from the original purchase price) and will mature, at par ($1,000 per bond) anyway, most in less than 5 years. It was a once in a lifetime opportunity and we’re glad we took it, although we regret the current slippage.
The market itself has been stingier with returns over the past few years unless you happened to have put all your money in both Apple (AAPL) and gold when both were in relentless uptrends.
We’ll hold our fire today as the market meanders. But, as we return, we’ll likely be adopting an entirely new and very simple strategy that we’ll tell you about in successive columns.
Again, we’ll see you in a couple of weeks unless something seriously turns up while we’re on holiday. Have a good weekend.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.
Follow Terry on Twitter @terryp17
This article is the copyrighted property of the writer and Communities @ WashingtonTimes.com. Written permission must be obtained before reprint in online or print media. REPRINTING TWTC CONTENT WITHOUT PERMISSION AND/OR PAYMENT IS THEFT AND PUNISHABLE BY LAW.