Wednesday, September 19, 2012

Short Attention Span Theater

The Credit Markets Are Starting To Get Stupid (Again)

Way back in January I discussed in some detail when investors would want to be in or out of the junk bond market (see ).  One of the most important things any investor in this market can do is know when NOT to be invested in junk, since owning junk at the wrong time can destroy quite a lot of value in a relatively short time period.  The hallmarks of a junk bond market that is starting to get overly frothy include excessively tight spreads over treasuries, high volumes of new bonds being issued, and increasingly lax structures that strip much of the protection afforded to investors by covenants and other features of these securities.  You might be inclined to think that after the horrendous debacle of 2009 the credit markets would exercise some discipline for a long time.  There is increasing evidence that you would be wrong to think that.

Monday, August 27, 2012

Trade Recap: JQC Has Followed The Script

I Love It When A Plan Comes Together

Back at the beginning of February, I highlighted what appeared to be an attractive medium risk trading opportunity stemming from the repositioning of a closed end fund with ticker JQC (see  Aided by a scramble for yield all over the globe, my expectations for the trade have largely panned out over the past 6 months.  This post will detail what has happened with JQC and try to answer the eternal question that stems from successful trades: now what?

Wednesday, August 22, 2012

Mission: Refinance Completed - The Post Mortem

Relatively Painless Experience

As I mentioned in a prior post I have recently been going through a refinance on my home with in order to swap an ARM for a 30 year fixed rate loan at what appear to be historically low interest rates.  The mortgage process is still time consuming and requires attention, but it is far less paper intensive than in years past.

Thursday, August 9, 2012

Burning Up...

The Grains Markets May Offer A Speculative Opportunity

A brief google search or a perusal of the financial news will tell you that the extreme drought conditions currently experienced by much of the US are wreaking havoc on 2012 crops, especially corn.  More recently, some areas have received some rain, but it is likely too late to revive the scorched corn crop.  Other crops are suffering as well.  Other than potential increases in food, energy and other prices, what does this mean to the average investor?

Monday, July 23, 2012

How To Chase Yield

Managing Risk & Being Careful While Doing Something Fundamentally Foolish

As old CDs, treasuries and similar very low risk investments continue to mature, one can hear the groans from investors and savers everywhere at the prospect of extremely low rates being offered on new bonds and CDs.  In many cases, investors and savers are finding that the rates offered are so low that they cannot accept such low rates and still meet their minimum return required.  This problem does not appear to be going away any time soon as central banks all over the world continue to do their utmost to keep rates on safe instruments very, very low.  Those who refuse to accept current rates offered on low risk bonds and CDs will continue to have the same quandary for the foreseeable future: what do you do with the money?  Many will choose to throw caution to the wind and adopt a strategy that has been the source of untold sums of lost money, chasing yield.  This is a dangerous environment in which to do so because lots of people are doing the same thing.  As a handy indicator, junk bond funds have been attracting enormous amounts of cash even as yields stay low and Vanguard recently decided to close its junk bond mutual fund to new money after being flooded with cash.  Yet many people will chase yield anyway since some are effectively forced to do so due to needing higher returns than they can get from safe instruments.  If you choose to chase yield, how can one manage the risk that inevitably arises from this strategy?  How does a sensible person add some yield in a judicious fashion?

Sunday, July 8, 2012

Fun With Housing Finance

The Mechanics of Refinancing In a Mortgage Market Gone Crazy

As should be obvious to anyone watching the markets, mortgage rates have fallen to record lows once again.  Turmoil in equity markets, sovereign debt fears and probably expectations about central bank actions have continued to drive interest rates lower on a wide variety of fixed income instruments including agency mortgage backed securities (MBS).  For conforming mortgage loans, yields on MBS drive pricing and rates on loans.  However, the mortgage market is a bit of a mess in the wake of the real estate crash and the dissolution of a large part of the mortgage origination machinery in the last several years.  The silly-low rates being dangled in front of would-be borrowers come with a bunch of strings attached and if you do not meet the many requirements to qualify for the advertised rate you are likely to pay far more in rate/fees or simply be unable to borrow at all.  Since the list of requirements moves around not infrequently, potential borrowers who are on the edge will have a tough time figuring out if they qualify until they actually commit time, money and hair-pulling to an application.

Late last week I locked a rate to refinance my current mortgage.  I will now explore the whys, hows, and what has changed over time in the mortgage process.  I am lucky enough to comfortably meet the current requirements for receiving the advertised rate, so my comments will largely be confined to the so-called "conforming" mortgage market.

Wednesday, June 20, 2012

How To Buy Life Insurance

Cutting Through The Sales Literature, Marketing And Misinformation

Many people at some point in their lives come to the realization that if they were to unexpectedly die their families would be in serious financial difficulty.  Often this realization happens when you start having children or take on a major financial commitment, such as a large mortgage.  A natural response is to buy life insurance to protect themselves, but all too often people do not buy the right amount, don't buy the right kind, or don't buy it from the right provider.  There isn't a great deal in the way of common sense guides out there and the insurance industry and the agents have a vested interest in pushing certain types of products to less-than-well-educated customers.  In addition, the insurance industry seems to thrive on producing an endless array of complex products which often sound a lot better than they are.  This will be an attempt to offer some basic guidelines of buying life insurance coverage.

Thursday, June 14, 2012

An Experiment In Bottom Fishing

Holding An Outsized Cash Position In Hopes Of Scooping The Market

Like many long term investors, I generally try to stay fully invested as a general rule.  Even at the best of times, cash typically drags down overall portfolio performance over the long term and most of us (myself included) are not great at guessing which way the market will leap next.  However, the past 5 years have presented investors with an amazingly large number of buying opportunities and I often found that being fully invested at such times meant that I could not fully take advantage of such opportunities.  I don't generally like keeping lazy cash around doing nothing, but I decided this spring to try hanging onto an abnormally high level of portfolio cash in expectation that a buying opportunity would materialize shortly.

Monday, June 4, 2012

That Was Fast

Chesapeake Caves To Shareholder Pressure Ahead of Its Annual Meeting

Chesapeake Energy (CHK) announced today that the company has pretty much completely caved in to pressure being applied by Southeastern Asset Management and Carl Icahn, who collectively own more than 20% of the company.  As I detailed in my last post (, CHK has been subject to a great deal of criticism due to its apallingly poor corporate governance.  Against a background of extremely low natural gas prices, this criticism has helped push the company toward a crisis and the share price has plunged as a result.  There is still one major unresolved issue with respect to the company's Board structure, but the increased clarity in governance allows an investor to begin to make an informed decision about the company and formulate an investment thesis.

Thursday, May 31, 2012

CHK: A Little Help From Your "Friends"

Chesapeake Energy Is Being Forced To Straighten Up, Like It Or Not

As I mentioned in the past ( ) and has been extensively detailed in the press, Chesapeake Energy (CHK) has finally been taken to task for abominably bad corporate governance and risky management of the company's balance sheet.  The shares have plummeted, the CEO has been stripped of his Chairman role, the company has taken a hastily arranged $4 billion bank loan, and efforts at the sale of some major assets are in progress.  More importantly, CHK's largest shareholder has turned activist and last week Carl Icahn disclosed that he is now the company's third largest shareholder and has some very specific ideas on how to improve things at CHK.  The stock (and even the bonds) have become very volatile lately and a large short interest has built in this name.  How will things play out from here?

Thursday, May 17, 2012

The Importance of Intestinal Fortitude

Making Money Requires A Strong Stomach

One of the hardest things to do as an investor is to stick your hand out and buy when the market is falling.  Most likely, whatever you buy will be offered to you at a lower price within minutes to days making you feel foolish for buying and filling you with regret.  Yet you will likely still have to make decisions and keep putting funds to work.  There are bags of behavioral finance research pieces showing that we feel the pain of losing money far more than we feel the pleasure of making money and anyone who did not just fall off the proverbial turnip truck knows that emotionally-charged decisions are often poorly made decisions.  There is also ample evidence that most retail investors are very good at underperforming the market.  For example, the most recent DALBAR study indicates as follows:

"The average equity-fund investor saw annual returns of only 3.49% in the 20 years through 2011, according to the latest analysis from Dalbar. Compare that with the average 7.81% annual return of the S&P 500."

- Source:

So what should an investor do to avoid sabotaging themselves?

Monday, May 14, 2012

Safe Money Yield Alert!

TIAA Direct Offering a 1.25% APY Online Savings Account

Many investors keep a chunk of their funds in "safe" investments, generally defined as things that have little or no prospect of losing you part of your principal.  This might be an emergency fund, a dedicated portion of one's portfolio, or merely a parking place for funds that you hope to profitably invest in the future.  Whatever the reason, such funds have become a bit of a problem because the very low interest rate environment makes it tough to even break even against the ravages of inflation.  Among a number of options is a savings or checking account, although at most banks you will receive an annual yield well under 1%.  However, savings and checking accounts have a certain appeal for at least a portion of your safe money as they are backed by the FDIC and generally offer pretty much instant liquidity with no penalties for doing so.

TIAA Direct, a banking subsidiary of TIAA-CREF, is currently offering a 1.25% APR yield on savings accounts with as little as $25 on deposit:  Although this rate can change at any time, it is one of the highest (if not the highest) on offer at the moment.  As long as this rate lasts, it appears to be an attractive option for investors wanting a highly liquid spot to park funds.  Of course, if the bank lowers their rate you can always go elsewhere.

Disclosure: I have no interest whatsoever in TIAA Direct and do not receive referral fees.

Friday, May 4, 2012

Sixteen Tons

A Brief Guide To the Coal Industry

"You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store"
- "Sixteen Tons" by Tennessee Ernie Ford

One of the industries that consistently pops up in my daily scan for attractive high yield bonds is the coal mining industry.  The coal industry has a number of peculiarities which investors should be aware of if they wish to dabble in these bonds, some of which offer double digit yields (Patriot Coal and James River Coal show up regularly in my daily screens with low teens yields).  Although I will have nothing to do with the industry due to personal ethical concerns, I have spent some time following the industry and will attempt to offer a brief guide to the basic economics of the industry, supply and demand drivers, and how to differentiate among the public issuers in the industry that investors might be looking at.

Wednesday, May 2, 2012


I don't know what happened on Schwab's website.  Perhaps the programmers were having a bit of fun or this was just some sort of glitch, but I never even thought to shoot for an infinity % gain in any investment:

Tuesday, May 1, 2012

Life Lessons

The Importance of Saving and Why We Invest

I was recently reminded by the good folks at the estimable (thanks for the compliments, guys) that this blog has been pretty much entirely about investing since its start despite the title of "Life, Investments and Everything."  I have wanted to establish this place as a source of useful information for investors that goes beyond the usual "soundbite" level of detail that is typical a lot of personal finance and investing online content.  Judging by the posts that get the most hits, I have succeeded in providing some insight and (more or less) plain language  explanations of some of the more neglected areas on investing (like junk bonds, merger arbitrage funds and equity indexed annuities).  But I have neglected the other topics I meant to focus on, especially some of the "life" stuff.  In the interest of providing useful information rather than babbling on about personal details nobody will care about, I thought it would be appropriate to talk about why it is important to save and learn to invest well.  Given that it is May Day and people in many parts of the world are out there celebrating freedom and the personal dignity of earning a living, this seems like exactly the right time.

Wednesday, April 18, 2012

Chesapeake Energy Needs To Be Sold

Aubrey McClendon Should Find His Own SandRidge To Play In

Chesapeake Energy (CHK) dropped as much as 10% today after a number of weeks of downward movement.  The drop today was occasioned by the revelation by Reuters that Mr. McClendon has borrowed as much as $1.1 billion (with a B) against his minority interest in CHK's wells.  CHK has always had a poor governance record and a "colorful" CEO in Mr. McClendon, but for some reason investors tolerated these shortcomings.  Mr. McClendon did after all start the company from nothing and build it to one of the largest natural gas producers in the world.  However, it is increasingly clear that CHK is still being run like a small wildcat driller rather than a large public company.  It is time for CHK to clean up its act, put Mr. McClendon out to pasture, and stop treating public shareholders like chumps.  In the process, there is money to be made.

Friday, April 13, 2012

Numbers Are In - You Can Get 2.7% Risk Free For 1 Year Money

Buy I Bonds Before The End Of April To Lock In More Than Double Equivalent CD Yields

As I detailed in an earlier post (, I bonds offered through offer a tax deferred yield that beats the pants off why you can earn on a 1 year CD.  With the release of the March consumer price index (CPI) data this morning (, we now know that the CPI rose 2.7% over the last twelve months.  Newsflash: inflation is way above currently available CD rates (about1%), even before taxes.  Because I bonds pay interest currently equal to the CPI, you can buy up to $10,000 per person (husband, wife, kids, etc.) in these bonds annually and shift low yielding savings to more generous I bond rates.  In addition to keeping up with inflation automatically, I bonds are tax deferred until you cash them in.  For more details, read my earlier post linked above.  But if you want to grab a 2.7% yield over the next year, don't procrastinate.  You only have until the end of April to lock in this yield.  If you wait until May you will get a bit over 2% for the first six months and an as yet undetermined rate (possibly as low as zero) the next 6 months.

As always, do your own due diligence, consult your advisor, and be careful.  Please do not consider the above as investment advice.  Note that I bonds cannot be surrendered before 1 year and carry a penalty of 3 months' interest if you surrender them before 5 years have passed.

Wednesday, April 11, 2012

Picking Up Nickels In Front Of A Steamroller

How Merger Arbitrage Funds Work

For many investors, finding new ways to diversify their portfolio and reduce risk while still making an adequate return is a constant struggle.  As trading costs and barriers to capital flows have come down, markets have become more integrated over time reducing the benefits of diversification.  Worse, in times of market stress in the past several years correlations between different types of assets have approached totality (with the exception of now very low return treasury bonds).  So the hunt is always on for assets with low correlation and positive return.  One of the options available to retail investors are merger arbitrage funds, such as the Merger Fund (MERFX) and the Arbitrage Fund (ARBFX).  These specialized funds offer positive (if modest) returns, very low correlations to most other asset classes, and very low volatility (its like watching paint dry).  But before running out and clicking "buy" investors should understand how these funds work and what the risks are.

Tuesday, April 10, 2012

Prosper By Ignoring The Financial Press

Why The Financial Media Is Worse Than Useless And How You Can Profit By Shutting Off The Television

Pretty much every day when the equity market moves - be it up, down, or barely at all - the financial media feels compelled to come up with some explanation as to why the market did what it did.  Explanations can be fairly direct, such as attributing a move to economic data, or they can be (to be polite) rather esoteric, as is often the case when the market moves significantly in the absence of a clear driver.  On days like today when there are big moves in the market the financial media usually ups the ante by shrieking about the big move, interviewing guests with a series of panicky questions, and even going so far as to highlight the equity ticker they flash on the screen with highway safety yellow just in case you failed to notice the big move.  Yes, CNBC and Bloomberg, I am talking about you.  All of this is quite laughable.  The media generally has very little idea of what is driving markets and all the histrionics on days of big up and down moves simply serves to help make the more impressionable investors more enthusiastic on the up days and more pessimistic on the down days.  I think wise investors will make limited use of the financial media and can actually profit by largely ignoring it.

Tuesday, April 3, 2012

Slim Pickings

Junk Bond Market Is Looking Pretty Picked Over

Every day I do essentially the same screen on the bond market.  I search for all junk rated bonds that are at least B3/B- rated across all maturities (junk rarely goes out more than 10 years) with a lot size of 10 bonds ($10,000 face amount).  I then sort the search results by yield to maturity, highest to lowest.  I am then presented with a list of the highest yielding bonds I can buy online through Schwab and can scroll down through the offerings until the yields drop below my minimum requirement (10%).  When I see a name I have not seen before, I usually do some preliminary due diligence and if the bond looks promising I will do more digging and possibly purchase some of the bonds.  Most things I look at do not meet my credit quality standards, but in most market environments I end up buying a bond here and a bond there.  However, lately the pickings have been extremely thin to non-existant.  It is becoming clear that the junk bond market is becoming less attractive and may be approaching the point where prudent investors do not buy bonds.

Tuesday, March 27, 2012

If You Want To Earn 3% Risk Free On Your Cash, Hurry Up

A Reminder To Jump On I Bonds Before It Is Too Late

As I mentioned in a prior post (, one of the places to put some of your "safe" money is I bonds issued by the US Treasury.  Bonds bought by the end of April will earn 3.06% for the first six months, with rates subsequent to that based on the consumer price index (CPI rate).  Based on the CPI thus far, I would expect the following six month rate to be over 1%.  An all-in 12 month rate would be approximately 2 to 3% depending on what the second half of the year's rate turns out to be (very attractive compared to a 1 year CD at 1% if you can even find a rate that high).  However, if you wish to jump on this opportunity you will need to move soon.

Monday, March 26, 2012

Where Do Junk Bonds Go To Die?

Sketching Out The Range Of Outcomes

Some bond investors buy bonds with the intention or at least strong possibility of selling them prior to maturity.  Other bond investors tend to buy bonds, put them away, and forget about them until they mature or default.  With investment grade bonds, the outcomes are fairly straight forward.  Most investment grade bonds are not callable and the overwhelming majority of them do not default.  In contrast, junk bonds have a wider range of outcomes which can materially affect an investor's returns.  In this post I will outline the more common cases and describe the implications for returns.

Thursday, March 22, 2012

A Treasure Hunt In Reverse

How to track down ALL the leverage on a balance sheet

When investing in either the stock of a leveraged company or a junk bond, it is important to understand how much leverage that company has.  Some leverage is very easy to find: you look on the balance sheet and there is a number labelled "long term debt."  Unfortunately, there are other forms of leverage that are not as clearly labelled, although it is disclosed by SEC filers if you know where to look.  As part of your reular due diligence, you should always tally up all the forms of leverage and ensure that the issuer in which you are about to invest has as solid a balance sheet as first appearances suggest.  As an aid to my readers, I will walk through a specific example and illustrate how to find all of an issuer's leverage.

Monday, March 12, 2012

Attractive Yield Opportunity In Stonemor Partners Bonds

At an 11% YTM, I am Dying To Get In

As the junk market has rallied, pickings have been getting slim in the 10+% YTM category.  Of the non-Caa/CCC rated names that regularly show up in my searches there are precious few I would want to own.  However, Stonemor Partners (STON) 10.25% bonds due 2017 (CUSIP 86184BAB8) recently offered at 95 cents on the dollar in retail sized lots appear to be one of the rare attractive yield opportunities currently available.  These bonds yield a bit over 11% if held to maturity and as much as 16% if they are called at the issuer's earliest opportunity.  While STON bonds do not offer a material capital gain potential, I believe they are a solid value for yield oriented investors.

Friday, March 9, 2012

Light At The End of the Tunnel, or Oncoming Freight Train?

A Value Investor's Dilemma When They Turn Out To Be Correct

Bottom fishing value investors (among whom I count myself) tend to have a thick skin, a willingness to ignore what everyone and their brother is saying, and the ability to hold their noses while clicking "buy."  In search of superior value propositions, we can look past uncertain business outlooks, messy financial statements, heavy debt burdens and even abrupt management changes.  We are accustomed to going it alone and relying solely upon our own judgement.  Perhaps that is why a persistent failing I see among value investors (myself included) is poor execution when the world comes around to the positive case for your investment.  After living through months or years of nothing but negativity about what you own, it is a bit unnerving to have investors change their view and start clamoring to buy your formerly hated investment.  To make matters even more confusing, if you have held the investment for any length of time you have probably seen brief upturns in valuation that have gone nowhere and quickly dissipated, so it is very tempting to bail out at the first sign of any positive sentiment.  Often value investors sell too early, leaving a lot of money on the table.  So how should a value investor gracefully and profitably exit their winning trade?

Monday, March 5, 2012

Where to Invest "Safe" Money?

There Ain't No Such Thing As A Free Lunch (TANSTAAFL)

We are in a persistent low interest rate environment and this shows no obvious signs of changing in the near future.  Many people who have been accustomed to receiving 5% and higher yields on CDs, treasury bonds and other "safe money" instruments are now faced with increasing maturities and have to decide what to do with the funds.  What should risk averse investors (or investors who keep some of their portfolio "safe") do with these funds?

Monday, February 27, 2012

Reversing the Flow

The Natural Gas Market Flips Cheniere Energy's Plans Upside Down

Today Cheniere Energy (CQP) announced that Blackstone committed to invest $2Bn in inequity in the company's planned project to build natural gas liquefaction facilities on the Louisiana coast where CQP has an export/import terminal for gas.  Handy press release with details here:

This is interesting to anyone who follows the US natural gas market, which must be the only commodity on the planet that hasn't rallied in the past couple of years.  Cheniere is a company with an interesting past.  In the 2000s, CQP quite a lot of money (much of it borrowed) to build out a terminal in Louisiana that would allow the import of natural gas from ships.  At the time, the US was clearly short of natural gas and prices steadily increased, making imports from other parts of the world profitable even with the considerable expense of liquefying the gas at its point of origin, putting it on a ship, sailing it a long distance, and regassifying once it landed in the US.  Unfortunately for CQP, not long after the company was really ready to ramp up its import terminal (these things take lots of time to build) the shale drilling/fracking revolution took place in the US natural gas industry and supply from onshore wells considerably outstripped demand.  Even worse, much of the rest of the world saw demand for natural gas outstrip supply, as Europe, China and more recently Japan ramped up purchases of gas.  The strategy of importing cheap gas from overseas to sell at a premium in the US was suddenly upturned.  Since the infrastructure CQP had developed was only designed to bring gas into the US, the company had a problem.

Wednesday, February 22, 2012

Cognitive Dissonance: What To Make of a Divergence Between Share Prices and Fundamentals?

Divergence Between Dry Bulk Share Prices and Rates Leaves Many Scratching Heads

Over the past two months, there has been a very large divergence between dry bulk day rates and equity prices, with day rates plunging on the order of 50+% since the beginning of 2012 while equities in the sector have done almost exactly the opposite. The above chart is illustrative of this trend, showing the Baltic Dry Index (an index of day rates earned by various types of dry bulk ships) dropping while a representative equity (EGLE, a leveraged owner of Supramax class ships) rises significantly. This has caused a lot of head scratching and profanity among the people who follow this sector closely. The short to medium term outlook for the industry is anything but positive, so it is quite frustrating to the sector specialists to see such a huge difference between what they know is happening in their industry of focus and the stock prices of companies in that industry. As an analyst I encounter this conundrum frequently, especially in the case of beaten up sectors and hated companies. So what are we to make of such cases? Is this just a temporary flash in the pan caused by the unwashed masses trading securities they don’t understand? Have all the “experts” missed some massive, obvious fact?

Tuesday, February 21, 2012

When To Get Off The Bus

Figuring Out When To Sell

Every investor must figure out what to buy, when and how much to pay. We spend a huge amount of time and effort pursuing the next investment, and Gawd only knows how many gazillions of pages have been written on how to do it. However, unless you are Warren Buffett, every purchase ultimately requires one to make a decision about when to sell this particular investment and at what price. Unfortunately, much less attention is paid to the sell decision, in part because the investment industry is primarily focused on taking in funds rather than disgorging them. Yet make no mistake: when you sell and for what price is just as important as the purchase decision. There are a few key considerations on sell strategies which vary according to the nature of the investment and the goals of the investor.

Thursday, February 16, 2012

The Dangers Of Chasing Yield: Always Read The Fine Print

Walking Away From RadioShack Bonds Due To Inadequate Covenant Protection
One of the hazards of digging around in the discard bin of the junk bond market is that an investor is constantly looking through what other people have run the heck away from.  Sometimes they have run away with good reason, sometimes they have panicked unnecessarily.  The only way to have a reasonable idea of whether a given bond is an opportunity or a trap is to very carefully do your own due diligence, including reading all the fine print.

Monday, February 13, 2012

Real Life & Natural Gas

For the moment, real life has gotten ahead of me, hence my relative silence.  I will be caught up shortly and be capering for your amusement in this spot shortly.

In the meantime, I would submit the natural gas market as a prime example of foolish, overly short term tunnel vision driving valuations.  Natural gas has dropped from $6 per MCF to under $3 per MCF.  A mild winter, soft industrial demand and the amazing success of modern drilling techniques (fracking) have resulted in a glut of natural gas and the price has dropped to the point that it is no longer economical to drill many wells.  Look and listen and you can find many comentators claiming that the world has changed, "this time it is different" and natural gas prices will never recover.  Equities in the sector have been under a lot of pressure, with many down a quarter or more in the last 6 to 12 months.

Monday, February 6, 2012

The Limitations of Magic Factories

What Insurance Companies Can and Cannot Offer Investors

As many investors cast about for a way to generate returns and stretch their assets as far as possible amid ultra-low interest rates and a “lost decade” in the US equity market, the insurance industry has responded with a dizzying array of product offerings. Many of these products seem to offer returns unobtainable elsewhere and “have your cake and eat it, too” options. While many insurance products offer significant value and can materially improve an investor’s finances and risk profile, there are also a plethora of insurance products that are long on the “sizzle” and short on the “steak.” Considering that a number of insurance products amount to giving away 10% or more of the money you put into them, investors need to be wary. In order to figure out which products genuinely offer value and which are merely a way to generate salesmen’s commissions and insurers’ profits, it is helpful to understand the environment in which insurers operate and how they manufacture their products. This post discusses how to evaluate whether an insurance product is genuinely valuable and when you can probably get the same thing elsewhere for a fraction of the cost.

Wednesday, February 1, 2012

JQC: Profiting From A Metamorphosis

Hitting a Single With A Fund Under Transition
In a prior post (, I explained how I scan the world of closed end funds (CEFs) for bargains.  Usually the realization of excess value requires patience, and the time you must wait can extend well over a year.  However, from time to time an opportunity presents itself in the CEF world which offers a far more timely excess return.  The Nuveen Multi-Strategy Income & Growth 2 fund (ticker JQC) offers just such an opportunity for excess potential returns which are likely to emerge within a relatively short period of time.

Monday, January 30, 2012

A Mortgage On Floating Collateral That Yields 13%

Navios Acquisition Bonds Attractively Valued
In a world of 10 year treasuries yielding under 2% there are still solid yield opportunities from time to time that should be bought.  Navios Acquisition (NNA) 8.625% bonds due 2017 and available for 83 cents on the dollar offer an attractive risk adjusted return currently yielding 13% to maturity and offering the possibility of a capital gain to go with the 10% cash-on-cash yield.

Monday, January 23, 2012

Rolling Your Own

How To Create Your Own Indexed CD or Equity Indexed Annuity On the Cheap

Banks, brokers and (especially) insurance agents love to sell a product that has a very mouth-watering top line pitch: equity market upside without the risk of losing money. Unfortunately, the reason they love to sell these products is that the commissions to the salesperson are typically fairly generous and the economics of the product are attractive to the bank or insurance company underwriting the paper. These products go by various names, most commonly appearing in the form of an equity indexed CD, equity indexed annuity, or fixed indexed annuity. Due to the very simple construction of these products, they are actually quite easy and cheap to reproduce in under 30 minutes a year in your very own brokerage account, giving you much better returns and offering a lot more flexibility.

Saturday, January 21, 2012

How to Buy a Dollar For 90 Cents

Arbitraging Market Inefficiencies In Closed End Funds

In a world of universally low yields and high volatility, it’s a tough time to be an investor.  Many people are nervous and prone to shoot first and ask questions later.  Since “safe” options like treasury notes and CDs are now offering yields less than inflation (a TIPS auction was recently concluded at a negative real yield), there really is no obvious place to hide.  Despite this difficult climate, there are still ways to generate returns that are in excess of current bond yields.  One option is to take advantage of other people’s panicky sales and buy dollars for 90 cents by picking through the market for closed end funds.

Wednesday, January 18, 2012

Dumpster Diving in the Junk Bond Market - Part 3

Mechanics of Buying & Selling Individual Bonds

So you have decided to take the plunge and pick out an individual junk bond or two. You have found a likely looking issuer of these bonds, done your (hopefully extensive) due diligence, decided that the issuer is highly likely to be able to pay all scheduled interest and principal payments and are determined to buy some bonds. How does one actually do this?

Wednesday, January 11, 2012

Dumpster Diving In The Junk Bond Market – Part 2

How to start searching for the pearls among the squishy shellfish innards

In my last post I laid out a general framework to determine when to be in and out of the junk bond market.   The problem is that much of the time the junk market is neither a screaming buy nor is it grossly overvalued, leaving us without much of a clear signal much of the time.  So what is an investor with a risk appetite and an interest in yield to do?  Assuming you wish to own junk at all in the “in between” markets, there are two viable options:

1.      Select a junk bond fund run by a competent manager with a long track record of solid performance.

2.      Pick your own individual bonds.

The first option is beyond the scope of this discussion.  Instead, I will focus on how to pick individual bonds.

Friday, January 6, 2012

Dumpster Diving In The Junk Bond Market – Part 1

When to be in the high yield market and when to be out

Especially in an environment of historically low interest rates (1% on a 5 year CD anyone?), many investors are tempted to chase yield in any corner they can find it.  If you have been accustomed to receiving 4 to 6% interest on a long term CD or bond and the investment matures today you are faced with a real problem, especially if you have been living on the interest.  The owners of such maturing investments essentially have three choices: accept current low interest rates on low risk instruments like US treasury bonds, CDs, and the like; attempt to earn higher yields by taking on more risk with junk bonds, preferred stocks, and the like; or buy an annuity from an insurance company with the proceeds of the CD or bond that just matured (probably only a feasible strategy at ages 65 and up).  With more and more people faced with this quandary as time rolls on and low interest rates continue with no end in sight, it is important to understand the risks and opportunities presented by the junk bond market before you give in to the temptation (or necessity) of yield-chasing.

Wednesday, January 4, 2012

Predicting The Future

Forecasting Lowe’s Destiny Via Its Balance Sheet
One of the ways investors can make gains is to predict the future and trade upon their predictions.  Of course, nobody can really predict the future with any degree of certainty unless they have insider information (which is both highly unethical and illegal).  Since most of us wish to stay out of the pokey, we have to settle for putting together the pieces of the puzzle as best we can and inferring what might be likely to happen in the future.  In some cases, this is quite difficult.  For example, given all the uncertainty that seems to be out there, what is the likely change in consumer spending between 2011 and 2012?  Econometricians will build complicated models to attempt to forecast such numbers, but they typically have a wide margin of error and are all too frequently flat-out wrong.  This isn’t intended to be a knock on econometricians; rather it is an illustration of something that is extremely difficult to forecast with any degree of confidence.

Tuesday, January 3, 2012


What is this blog about?

I have been an investor for my own account for almost 15 years, managed money for others, published numerous studies on specific industries, and spent time as a buy-side investment analyst.  In all that time, I have never had the luxury of writing about what I thought was interesting and noteworthy.  Professional demands always meant that I wrote at the direction of others, often producing valuable but fist-eatingly and excruciatingly dull material that was served up to someone who would read it and move on to the next umpteen pieces of the day.  Worse, there was little to no interaction on the subject matter with my readers.  With this blog, I aim to change all of that.