"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

You're assuming that I have a lot of confidence in any given means of analyzing
options, calls, convertibles, etc.

I don't. Indeed, if any particular means of analysis were highly reliable, then
there would be no market for options, calls, convertibles, etc.

On the other hand, I personally believe some analysis has value. Choosing a
stock or bond is not a crap shoot. I said as much before.

- quote -

I defy anyone without *at least* a year of college-level calculus and prob/stats
to explain the Black-Scholes formula(e) competently.

Risk analysis is well beyond a high school algebra course.

I have no idea why you mention linear algebra. It's not particularly pertinent
to risk analysis.

- quote -

A specialized vocabulary, sure.

- quote -

Of course.

- quote -

You're backpedaling or something here.

When one chooses A over B, one should have a reason. I thought we agreed on this
point.

This is getting a little silly...

- quote -

I refuse to accept the word "substitute" above as valid. It's just too loose.

Preferreds are a different animal from corporate bonds.

snip stuff that just doesn't seem relevant to the point we were discussing or is
repetitive or is obvious, IMO


======================================= MODERATOR'S COMMENT:
Please either bring this thread back to general personal finance or consider private email. -HWW

Caroline wrote:
- quote -

I think we're back to my point about "investor overconfidence"!

- quote -

It's not a math-skills issue really (most of finance has more to do with
high school algebra than linear algebra). The analysis is difficult in
the same way that, say, tax is difficult, even though tax is mostly just
addition and subtraction. The math skills don't matter as much as
knowing what the heck amortization of premium means and when it applies.

You've got similar issues when analyzing a beast like a convertible
preferred stock. Arguably none of the tasks is particularly difficult,
but the whole exercise is time-consuming and requires specialized
knowledge. It should be repeated periodically because your underlying
assumptions will need to be re-evaluated as the company's prospects
change. Which raises the question, "should you even bother?" Weigh it
against the value of free time, if nothing else.

For my buck if you're trolling around preferreds as a substitute for
corporate bonds, and you aren't making a career of it (and aren't
applying it to a big chunk of money), stick to the simpler ones that you
evaluate on the current yield and the company's debt rating. If you get
to the point where you can do a complete analysis of arcane things like
cocos and their preferred counterparts then it may be time to consider a
career in finance, where you could apply that analysis to a few million
bucks instead of a few thousand. If you skip that analysis, you're
throwing darts.

And if you're a buy & hold investor, seriously weigh the alternative of
buying and holding funds. Individual securities need to be watched, and
there are more interesting things to do with free time!

-Tad

"Caroline" <caroline10027remove[at]earthlink.net> writes:

- quote -

My apologies for messing that up, but the principle is
the same -- any convertible security has an embedded
option that needs to be accounted for.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote
- quote -

No. See below.

- quote -

My focus in this discussion has been on high-yielding preferred stock,
particularly convertible preferred stock.

"Convertible preferred stock" is not interchangeable with "convertible bonds,"
though they do have some things in common. Then again, "convertible preferred
stock" has things in common with "common stock." We could go on and on.

When I read the word "options" in a financial newsgroup, I think of the
dictionary definition of "stock options." Convertible preferred stock is not the
same thing. Purchase of convertible preferred stock provides the same so-called
"option" as purchase of any other stock, the only difference being that if one
does not sell by a certain date, it automatically converts.

Are the techniques for analyzing the pricing of stock options similar to those
that analyze convertible preferred stock or even convertible bonds? Sure.

Tad feels it is difficult to analyze options, calls, convertible whatever, etc.
My feeling is that we are talking largely about risk analysis, including
forecasting a company's performance. I don't consider such analysis difficult.
Bottom line, it tends to be highly formulaic.

I have a background in mathematics (including probability and statistics). Also,
over the years I have become specialized in communicating the meaning of the
math in a particular application to laypeople. Again, I'm not trying to flaunt
this or anything, but perhaps Tad's point is that the mathematically-averse
investor would find such analyses overwhelming. I can believe this.

Yet I also think many non-mathematically inclined investors can grasp the
underlying concepts of such analyses. Indeed, it wouldn't surprise me if many
licensed financial planners et al. haven't much of a clue about the mathematics
underlying certain valuation models. Which is fine. Most people don't know how
an automobile engine works, yet they drive competently every day.

Then also, the value of a an analysis is only as good as the analysis's
assumptions. In the case of analyzing options, calls, etc., using say
Black-Scholes or whatever, the assumptions are arguably huge. This is not to say
that such valuation techniques are useless. It is to say I consider them as
valuable as, say, classical stock pricing models. They're useful (to me anyway)
but not perfect.

"Caroline" <caroline10027remove[at]earthlink.net> writes:

- quote -

You're talking about convertible bonds, right? Then you *are* talking
about options, whether you realize it or not.

A convertible bond is a combination into a single security of a
normal, non-convertible bond and a call option. So if you want to
analyze and price a convertible bond correctly, you have to take its
embedded call into account, which means using the techniques of
options analysis and pricing.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"TB" <borekfm[at]pacbell.net> wrote
- quote -

Of course.

I have no idea what your objection is. You seem to be focused on options. I'm
not looking at them.

I agree analysis should be done when choosing A over B and thought I said as
much.

- quote -

As long as one is investing for the long term, IMO one need do nothing different
than have diversity appropriate to one's risk tolerance.

I'm not competing per se. I'm a buy and holder.

- quote -

I still have no idea what your objection is.

EMH does not really have any unique counsel for the long run.

- quote -

Again, I'm not a timer.

Caroline wrote:
- quote -

You're not required to do the analysis, but if you did, it wouldn't be
easy (did you really crank through Black-Scholes?). Of course you can
just choose to skip that, or do it in an ad-hoc way. But if you're going
to bother with individual securities, choosing A over B, it should be
done for a good reason, or else it's just a hobby (if you aren't doing
something better than a readily-available mutual fund, why bother?). The
people overseeing large amounts of money and setting the pricing of A
and B are using those types of analyses. If you don't do them, or at
least, if you don't substitute something equally valid, you're allowing
an element of chance to interfere.

- quote -

[underwriting stuff] - the Bond Market Association web site has some
info on bond markets & the underwriting process, and of course there's
google (and the libarary)

- quote -

"Avoiding overconfidence" is at least as useful as exercising
objectivity, IMO. Nobody can assess future interest rates (or dozens of
other variables) objectively. But you can assume "I can't predict future
interest rates very well" and act accordingly.

Also: if you strike out on your own, do something with a reasonable
chance of generating additional rewards, factoring in the research time
required. Realize that once you do it you're in competition with many
thousands of other investors, including 'mr market', as well as those
running mutual funds you could buy at low cost. So you need to do
something different from them, or better than them - otherwise you've
wasted time and have less money than you would have. EMH says it's going
to be difficult to do better, and if you believe in EMH, you might not
bother trying. (EMH? google...) I bother trying really in one narrow
realm: contrarian "out-of-favor" stocks.

- quote -

"Time & patience" yes, luck - no! Unless you're messing with the types
of investments that are, at the end of the day, more like Parcheesi than
chess.

-Tad

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

:-)

- quote -

I think it just muddies up the discussion but is not all that difficult. :-)

So a company calls its bond (or stock). I go out and find another one. The
"call" factors into the yield, etc., after all. It means I have to plan. Oh
heavens. ;-)

Similar for conversions.

I think they are a lot more predictable than non-preferred stocks.

- quote -

Now *this* may be beyond MIFP.

I thought spanking-brand-new-issue corporate bonds have the same yield
everywhere or most everywhere, setting aside any brokerages that charge a
commission for any bond sale. I believe TD Waterhouse and Fidelity, for example,
often have effectively identical new issue corporate bonds. The only difference
is the CUSIP.

(Aside: Someone got on my case about distinguishing between different CUSIPs a
while ago. But maybe the person was being a bit anal. It seems a fairly academic
and irrelevant point in many contexts.)

It's when the bonds become available on the secondary market that the broker's
fees get factored in very explicitly. Or so it seems to me.

- quote -

Agreed.

- quote -

Aside: I get the feeling a lot more people are interested in junk bonds (and
preferreds) than I.

I pay little attention to junk anything for various personal risk/comfort zone
reasons.

On principle, I do post to others that having some higher risk, higher yield
bonds/securities in one's portfolio is consistent with diversifying so as to
optimize yield. I don't have a problem with mutual funds that have a few
percentage points of junk, of course. But junk just is not really factoring into
any of my thinking here when we discuss bond ladders and or a portfolio of
preferreds constructed by an individual.

- quote -

Yes, although I think there may be other, somewhat more upbeat ways to translate
a REIT's high ROC. Too lazy to search right now. Otherwise, I'd be guessing.

.... plus, REIT dividends are exempt from the tax break put into place last year.
I'm sure you know why.

- quote -

Yes, we're on the same page.

- quote -

At the moment I am struggling with whether I should go the safe route with
mostly mutual funds or whether I should strike out mostly on my own. It's going
to be some combination, for sure.

I remind myself the key is to find some objectivity. Lose all emotion; look only
at the numbers, and longer-term ones at that.

Maybe your analogy about being the house instead of the one enjoying the free
drinks isn't spot-on for me. The house makes oodles of money at no risk, as long
as there are enough customers. The gambling odds are in the house's favor,
big-time.

With the markets, the odds are "in my favor" for the long term as long as I have
blue chips or a nice diverse package of small, medium, and large caps.

But I'm not going to rake in money with the markets. To me, that's luck. (Timing
is too much stress and I'm not convinced the average timer does better, anyway.)
The people who rake in money in general have their own businesses. They're the
"house." (I am reflecting partly the claims of _The Millionaire Next Door_.)

I'm simply going to be comfortable. Yet to me, along with freedom, that's a lot.

Index funds suit me fine, for example.

All of the above is just to clarify from where I am coming. No need to comment.

- quote -

Yes, sorry. I tried to emphasize that.

- quote -

I thought the conversion was definite. It's not like a call.

But maybe you're right and some issues are structured so as to make the
conversion optional (and at the company's choice). It seems reasonable that some
companies would do this...

- quote -

Nah. :-)

I ran the numbers for my one conv. pref'd stock a few years ago. It boiled down
to if I held the stock to the conversion date, my total yield would be somewhat
less than planned, but still pretty good. So I could make a pretty
(mathematically) rational decision.

- quote -

Just moved West.

All I know is California bonds are mostly or all junk right now. I guess
California's power problems are likely related to the junk ratings. ;-)

- quote -

I shall not be presumptuous on the subject, then. :-)

Caroline wrote:
- quote -

bankruptcy

- quote -

Yes! Called, what else?... http://www.freeedgar.com

- quote -

Yes it would be more correct to substitute "dividends or interest" in
every reference because it could be either, for the securities lumped
under "preferred stocks" (whether in WSJ, quantum, etc).

"Convertible" is the less-typical version BTW. Adding conversion rights
complicates the analysis tremendously - you're in effect buying debt
coupled with a warrant and pricing of that, especially with a call
provision...well let's just say it's beyond the scope of an MIFP discussion!

- quote -

If you can buy it on an exchange, at some point it was a new issue,
regardless of what it is.

- quote -

The firm acts as principal, meaning sells from inventory, with a
"spread." They make money on that spread.

- quote -

They should be, you'd view it as a total-return kind of investment. Not
that I would advocate any of these at the moment, but consider as an
example Ford. There are several Pr issues, that big 7.5% bond offering,
and the stock itself. The company has some risks, eg pension
liabilities. So if you were looking at one of these I think it'd be a
good idea to weigh it against the others because in any event, you're
taking on company risk.

This is less of an issue with top-rated debt. Typically though the
higher yield issues you'll find will come with somewhat distressed
companies. And once you're looking at a distressed company you're
considering adding risk...and once you do THAT it's logical to allocate
it to where it's best rewarded. At the end of the day the common-stock
returns should be much greater than those of the preferreds, unless the
company takes a dive, in which zero will equal zero for everyone.

This doesn't sound like what you're looking for...but then again you did
mention utilities. If you buy an El Paso preferred you might just as
well consider EP because in BK they're both worth zilch. And that 15%
dividend might be a week's worth of gains in the stock. The same type of
reasoning applies, though to a lesser degree of course, to distressed
companies (Ford might be an example, though its preferreds comprise
several different types of liabilities).

- quote -

OK so I'm a little old school, I still run through the Pr's using the
newpaper, where it's all mixed up. Quantum now has things organized by
type and puts the REITs in a separate category, as they should be.

- quote -

The growth of return of capital is recent, the dividends used to be true
income. I see that growth as a negative, it means the REITs don't see
the investment opportunities out there and/or aren't collecting the
rents they used to.

The broader point is that (equity) REITs behave differently, so you
should consider them another bucket beside stocks, bonds, cash - even
though they'll be lumped with "income securities."

BTW if you want to cover REITs there are several index alternatives that
provide quick diversification at low cost. Vanguard's fund, and the
iShare IYR for example. Or, of course, you can cherry-pick.

- quote -

I've just caught on that you seem to be looking mostly at convertibles
(a subset of preferreds). They're a different beast and honestly,
analysis is difficult. The convert provision is priced into the security
so you need to assess the difference in yield vs. the likelihood of
conversion, both under call and no-call scenarios. This is a fairly
advanced analysis task that - IMO - is best left to those who can apply
their conclusions to very large chunks of money.

- quote -

Hmmmm...you're not in the West are you?

Utilities have changed a lot. Quite a few of them have substantial
bankruptcy risk, or are in the bankruptcy process. Like the utility
serving 5% of the United States, including yours truly!

-Tad

Caroline,

If you want to dabble in preferred, take a look at the Forbes/Lehmann site,
www.incomesecurities.com, I subscribe to it and have done very well.
There's too many types of preferred to just arbitrarily buy one without lots
of research. I'm not very smart on preferred so as the newsletter. Some
preferred are bonds that have been broken up into preferred. The nice thing
about preferred as you can buy and sell them easily just as stocks. The bad
thing is for the most part, most do not have maturity dates closer than
about 40 years so look at them as long term bonds I guess. Some are very
stable, some are less depending on the industry etc... Airlines etc..


"Caroline" <caroline10027remove[at]earthlink.net> wrote in message
news:w%7Zb.427$aT1.76[at]newsread1.news.pas.earthlink.net...
- quote -



======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond.

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

BK = ?

Otherwise, okay, 1. partly explains why the yield is higher.

- quote -

Yes, I notice the quantumonline list is chock full of callable issues.

Is there an easy online equivalent to EDGAR where there is no fee?

I can dig and get a lot of info online, but from what I see about EDGAR, it is
more efficient. I just don't want to have to pay for a service IF I do not have
to. :-)

- quote -

I agree. I bounced a few of the stocks at the Quantum list off the Yahoo
financial listings and found some differences immediately. Quantum does have
some sort of fairly prominent disclaimer on this. It does note the date of the
Moody ratings, and some are a year or more old, IIRC.

- quote -

Just to really confound point 3, might you mean "interest" instead of
"dividends" above? And yes, it makes sense that corporations are taxed
differently on these, thus the yield is different, etc.

Many (all?) convertible preferred's pay interest, not dividends, to the
individual, who likewise pays taxes on the interest.

This is a drawback for the individual right now.

Though maybe it helps explain the higher yields, too.

- quote -

Okay, especially the last sentence above.

- quote -

Do you mean brand spanking new *stock* issues?

I tarry over new issue bonds because the purchase fee/commission is "zero." Not
so for secondary market bonds. ("Zero" is in quotation marks because I assume
companies like Fidelity receive some sort of payment from the company issuing
the bond.)

- quote -

Hm. I'll have to think about this as an analogy, though this may be
over-analysis.

I haven't gone looking for new issue convertible preferreds that are about to be
issued.

Until recently, I owned some for a couple of years. Electric utility. (Many on
the Quantum list are electric utilities, which is something else I want to
research.) I actually learned about this from a relative, who got a suggestion
from his Edward Jones broker to buy some. (Aside for newbies: The relative is
now annoyed with EJ and the broker. He got "duped" into precisely the baloney
the media has covered; EJ pushing mutual funds etc. in which EJ has its own
interests. Fortunately, no significant damage done.)

I was very happy with the return. The price stayed around where I bought it or
rose. Only sold (and at a nice gain, too) to buy some real estate.

- quote -

My little experience shows that the common stock yields (dividends) tend to be
significantly lower.

- quote -

Anyway, I'll do as you suggest.

- quote -

Okay.

- quote -

Okay.

- quote -

Maybe I'm misreading you, but I myself don't consider REITs in the same category
as convertible preferreds. Similarly, I don't see them on the Quantum list.
(Maybe we're just agreeing on this point.)

I am aware REIT yields are often good. Also a sizable portion of REIT yields is
often not taxable. But one somewhat off-putting reality I am now facing with one
REIT I currently own is the return of capital (ROC) is getting large. As you
surely are aware, but just to get it out there, the ROC reduces the cost basis.
If I hold this particular REIT a very long time, no big deal. This wasn't quite
my plan when I originally bought the REIT, so lesson learned.

- quote -

I looked at KTX. Okay.

- quote -

I'd appreciate your or anyone checking the following reasoning:

When interest rates do rise, this will drive the price of currently high rated,
high yielding convertible preferreds down. E.g. suppose 8% is the current yield
of a stock X but equivalently-rated stocks three years later are yielding 11%.
This drives Stock X's price down by about 28%.

How to plan?

Before buying Stock X, I think one should study what the conversion terms are.
If the conversion terms are favorable, then the risk is less. One then just has
to hold Stock X until it converts.

- quote -

Correct me if I'm wrong, but electric utilities do not seem to go bankrupt. What
utilities do you have in mind? Telecommunications?

- quote -

Thanks for your comments.

All credit to the poster of a few weeks ago who first brought Quantumonline to
my attention.

Caroline wrote:
- quote -

Caroline,
A few comments about these securities:

1. In general, their priority is lower than bonds, so they should
provide higher returns. ('priority' in the bankruptcy sense) In Ch11 BK
the preferreds will in most cases be cancelled, and it's almost as
likely for the income trusts (MIPS, QUIPS, etc). Bondholders should get
something though, even if not made whole. This is a consideration not
just in BK but in connection with any debt-rating downgrades. As an
example, the airline issues have all sorts of risks. Someone concerned
about growing consumer debt might steer clear of the securities that
rely on those debts for income.

2. A diligent analysis will often require digging up the original
filings via EDGAR, so you can see all of the provisions associated with
the security, and understand exactly what cash flows are providing your
dividends. A common provision is some type of call and you need to
factor that into your analysis. A 9% yield does no good if you won't
receive it. Quantumonline is great & I recommend using it (and have used
it myself for years), but I don't think it's a good idea to rely on it
for that level of detail.

3. Put your tax hat on & think in terms of supply/demand for
these...true preferreds are attractive to corporations because the
dividends aren't taxed the same way as other income. And they're
attractive to you because of the 15% cap in dividend tax. So it's
similar to munis where, when comparing issues, it helps to think ITO
after-tax returns. Some return variations are explained by taxes.

4. Also re: supply/demand - I don't know why anyone would bother with
new issues. Let the market price the security and then assess it
yourself. Buy new and expect to pay like...well like the person who buys
next year's car right when it's released.

5. If you're considering taking on risk through a preferred, ie buying
something that isn't AAA (not that you are but for the good of
usenet...) be sure to weigh the alternative, which is buying the common.
There are times where the potential upside of the common stock points
towards buying it rather than the preferred.

6. Learn whether the dividends are cumulative or not, what can trigger
suspension of a dividend, and what other issues have priority if
dividends are suspended.

7. With some issues (the income trust structures) there is the potential
for a taxable event absent a dividend. The quick way to put it is that
creation of the receivable is considered income. This isn't a problem in
an IRA but it's a bummer to owe tax on a dividend you didn't get
(especially because when it's not paid, it means things aren't going
well and the price is low).

8. A lot of what you'll find is REITs which should really be treated as
a completely different asset class in your portfolio, and analyzed
accordingly.

9. I have no explanation for it but I do observe what I would call
"mispricings" among these securities. Look at KTX (to point to a
hindsight "win") in 2002 - I assume someone out there feels silly for
dumping 20k shares that were about to return 150% (plus dividend, when
the yield was 20%). Maybe it's because they aren't traded much but it
does create opportunities. Unfortunately this requires following
companies as well as their stocks and you might not want to bother.

10. The yields may look tempting now but realize when you trolled this
stuff a couple years ago you came up with tons of stuff in the 10%+
range. Bonds are fully priced, junk bond yield premiums are very narrow,
and it's a market at work, so there's no reason these would be immune.
Show me an 8% yielder and I'll show you something that paid 11% not long
ago, and that might very well pay 11% again in the future.

11. You do need to keep an eye on these. A portfolio of conservative
preferreds ten years ago might have included some companies (eg
utilities) that no longer exist.

Kudos to you for doing the work, though - I think these can fit in well
as an alternative to corporate bonds. Why more individual investors
don't dig into these issues for income is beyond me.

-Tad

"TooTall" <TooTall[at]TooTall.com> wrote
- quote -

I assume you mean secondary market bonds. I agree $19 is a competitive rate.

But for new issues, do you still pay $19?

- quote -

I can believe this. Again, as I try to mention now and then amidst my
skepticism, I feel there are some honest and competent financial managers, and
there are some not so honest and not so competent.

- quote -

Aside: I'd be very interested in your further comments on trading the preferred
stock.

Several weeks ago another poster here suggested using www.quantumonline.com for
preliminary searches for "exchange traded income securities" that pay high
yields, like certain preferred stocks. I registered there (it's free), then
clicked on "Income Tables," then "Exchange Traded Income Securities." Many high
yield stocks come up, and many have investment grade Moody ratings. (These
stocks pay interest, not dividends, and are so some sort of hybrid between
non-preferred stocks and bonds, as I trust you are aware.) They tend to yield
way more than what an investment grade, long-term corporate bond yields right
now. For example, GEA, IJD, and KTB are yielding around 6% and have Aaa/AAA
ratings.

Right now, what I'm trying to "forecast" with these highly rated securities is

1. how would I feel if their price dove
2. the likelihood of a price dive while I am waiting for them to mature
3. the effects of conversion (to non-preferred company stock) on my portfolio
(e.g. convertible preferred stock)
4. how closely I need to watch them; Do they tend to stay pretty steady in
price?

If they are pretty steady in price, then it seems to violate the rule "there's
no such thing as a free lunch."

I guess the yields of these highly rated preferred stocks are higher precisely
because there is the risk the price will go down. An Aaa/AAA rated preferred
stock is not quite comparable to a similarly rated corporate bond that one plans
to keep to maturity. The preferred stock is riskier.

Comments from you or others are welcome, especially those who have traded for
more than five years in high yield, highly rated preferred stocks.

- quote -

I appreciate your talking about the numbers. I agree it's worth my consideration
to hunt for a competent bond manager.

- quote -

:-)

And yet, the basic notion of pooling mortgages so as to reduce risk etc. makes
sense.

- quote -

Well, with all due respect, I still find it much more simple, but maybe this is
because I won't contemplate any significant portion of my portfolio being in
junk bonds. Maybe this is why we're not quite on the same page in our estimation
of the simplicity of bonds v. stocks...

Caroline,

I feel that I can call my broker and they will fine just about any bond I
want, not all. My financial manager had me sign an something allowing him
to buy bonds thru agents other than broker. Oh by the way, Try getting a
flat $19.00 fee for bond purchase like my manager does. Volume again.

To help clear up some things I said previously. My investment manager is
more than anything is a bond specialist. That's his baby, he has one
software subscription of 100K/year. He has a Bloomberg terminals (at 3,000
a pop) in his office and one in his car for God's sake. (can you imagine
trading at 70 mph, ha) He's got credentials coming out of his ass and well
as being a part time professor.. He's got a staff of about 5 people helping
him in the office.

But forget about prices and availability, that's really where I misguided
this conversation, my fault, sorry. Cheap prices is not worth the fees I
pay alone. What is worth it, is that he makes me more money than I can make
by myself and yes that includes the fees. How do I know, because I have
been a bond and preferred stocks do it your self person for a couple of
years. I can't compete. Last year, I made 17% in my account trading high
risk preferred, junk and above bonds and options covered calls and cash
puts. None of my bonds are above BBB. Ha. My investment manager, made 20%
trading AAA mortgages and maybe 15% junk. Had I rather make 17% as a do
it yourself Mike Milken or pay someone to get 20% with 85% of my account in
AAA. (This years projection is 10-11%). (well I'm still trying to be the
junk king on my street but just as a hobby, my investment manager gets the
money that will pay the bills when I get older.)

I was like you, very skeptical of these guys and heard some really bad
stories. I still feel skeptical about most of them. But on a
recommendation I went to see him with no intention of working with him. I
just wanted to see if I could learn a little something. That's how I got
started with an outside advisor. He's a gem and I'm so thankful that he is
still a young man relative to my age so I don't have to worry about finding
someone else to handle my bonds.

Yes the REMICs, that definitely is a mind altering experience isn't it? Ha.
That's why I get a kick out of these folks that think the bond business is
so simple. Tad Borek's summation of the issues we have been discussing
really focused me in on the real issue. For my situation, that is.

TooTall


"Caroline" <caroline10027remove[at]earthlink.net> wrote in message
news:QUdYb.6706$tL3.5943[at]newsread1.news.pas.earthlink.net...
- quote -



======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond.

Tad,
You are very articulate in summing up what we have talked about and your
perspective is right on in my opinion. Regarding your statement:

But that raises the general active-management problem
- quote -


Again you have articulated what I could not to Caroline. This is exactly
why my bond returns are doing above the norm. Better prices? Yes he get
them but the real reason is his expertise. I have always been a do it
yourself investor. In my retirement research, I stumbled across a bond
manager who specializes in bonds mostly MBS. I feel I am very lucky as I
have spoken to many investment managers who have no clue of some of the
techniques he uses and specializes in. Risk, of course, just as you said.
But to those you can identify the real gems they are rewarded. I am lucky.




"Tad Borek" <borekfm[at]pacbell.net> wrote in message
newsY9Yb.24529$Jm.19403[at]newssvr27.news.prodigy.com...
- quote -



======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond.

"Tad Borek" <borekfm[at]pacbell.net> wrote
Caroline wrote:
- quote -

Tad, why are we talking about what isn't available to individuals?

Yes, yes. You wanted to comment... ;-)

- quote -

Moving along to what TooTall, I, and the rest of the individual bond buyers
*can* have...

A bond mutual fund is fine for some people. For others, individual bonds have
their advantages.

But let's leave this for another day. I'm still recovering from my REMIC
studies. :-)

- quote -

Fine. Enough pops up for individual investors to keep me hopping, though right
now, probably only for short-medium term (5-10 year) bonds. Appropro of another
discussion recently posted here...

- quote -

Yes, that's a better way to look at it. :-)

Caroline wrote:
- quote -

Oh, I don't think those are the alternatives...as I've written before, I
don't think many investors should even bother with individual bonds. Pay
Vanguard (or whomever) their 23 basis points, and forget about it.
You're diversified, you tap into that majority of issues that never make
it to retail, you let them buy wholesale for you, you reinvest interest
as it's paid, you can invest & withdraw money on any date in any amount,
they track cost basis for you, and you never have to figure out those
awful parts of the tax code (OID and premium amortization).

- quote -

No, I'm saying that most bonds aren't available to retail investors in
either channel (discount or wirehouse) because they move in
multi-$million chunks to/among the institutional investors.

Here's an anecdotal kind of test: watch the WSJ, or Yahoo Finance, for
some new bond issues. Then see how many of them you can find through
your broker. Example - I just grabbed a headline:
Solo Cup sells $325 mln 10-year notes - 8.5%.

"OK, cups, my coffee habit alone will keep them going, maybe I'll get a
piece of this one." Call up broker. Solo who? It's not there. Actually
if you pick just about any company and look for their debt, it's
unlikely you'll find much available. It's like looking for office
buildings for sale on Craig's list. (actually I cheated a little on that
one, it was a private placement)

Not that the pricing will necessarily be awful for something that does
pop up - it should be good with Treasuries, and respectable (on the buy
side anyway) with munis. But most of the $22T in debt out there just
won't pop up.

- quote -

I'd say it's to make sure you're the house, and not the one sipping the
"free" drinks!

-Tad

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

If you're in this business, I trust you are aware that corporate and municipal
bonds and Treasuries are easier and less expensive to purchase these days than
even a few years ago. Companies like Edward Jones, Schwab, Fidelity, Vanguard,
etc. have strived to be competitive, and it is showing, IMO. (The increasing
openness of the bond market itself clearly indicates market effects. People, all
skittish because of the last few years, want more bonds... )

I think we're agreeing we have the classic tradeoff: Go to a for-fee and/or
commission broker and pay for a greater selection of bonds, quite possibly
enjoying a greater yield even when the fees/commissions are considered, or stick
with a discount bond broker (like Fidelity).

- quote -

No dispute.

- quote -

Or to put it in other terms, paying about *twice* the yield of what your
typical, longer-term, investment grade corporate bond is paying right now.

This is where I'm having my doubts about TooTall's claim. It's the size of the
difference he's claiming. (Correct me if I'm wrong, but you seem to agree on
this.)

- quote -

Agreed.

- quote -

Agreed. As I reflect on TooTall's claim, this is the sort of economic/financial
premise under which I'm operating.

- quote -

I'm not sure I understand precisely the meaning of the last two sentences above.

If you're simply saying individual brokers offer more fixed income vehicles
than, say, Fidelity or Vanguard, I can believe this. But they do so for a
fee/commission. ;-)

But again, I have doubts the fixed income yield is necessarily a lot higher
going the route of the full-service bond broker.

- quote -

Absolutely. No dispute.

- quote -

Agreed.

- quote -

Yes. With all due respect to TooTall, I'm wondering if he's bought into this
belief.

But again, to TooTall: I have learned a lot in this discussion and hope he
likewise is more knowledgable on this subject as a result of it.

- quote -

Throw in a little numerology, and we have a Royal Flush. ;-)

That is, I think there's some obsessing about certain statistics that often have
little basis in determinism.

- quote -

My view:
As I think a small intelligent ;-) circle at misc.invest.mutual-funds agrees, do
not obsess about being #1 in individual investments. Those who make #1 are there
inevitably by luck. The aim of financial advisors, their clients, and
individuals should be to simply do well in the great "crap game" of the
long-term markets. Certainly don't lose your shirt. Certainly don't leave all
your money in a bank account for the next twenty years. Healthy diversity for
the long run, in accordance with one's risk tolerance, along with striving for a
happy life, are paramount.

Thanks for your remarks. I'm not running off to speak to a bond broker. Yet.

(Nor am I messing around with these posts on fixed income I've made recently.
These exchanges are part of a serious, personal finance research effort. All
rational comments on these posts are welcome.)

Caroline wrote:
- quote -

Caroline,
Institutional investors (including mutual fund managers) most certainly
have greater access to fixed income than retail investors, and obtain
better pricing, because of the transaction sizes. Why would $5,000,000
in debt sell to 1,000 retail investors as 1,000 separate transactions
when there are literally thousands of institutional investors for whom
$5M is just another trade? Yes, some issues make it to the retail side
but there are some inherent inefficiencies in that channel. Actually, it
might be fair to say that the only way issues make it there is if the
pricing compensates for the inefficiencies.

Also - as this thread seems to be discussing (I'm only skimming) - there
are some debt instruments that aren't typically the purview of the
retail investor looking to park a few $k. It would be an inefficient way
to raise capital, or to trade debt that you're holding, if "you" are,
say, CalPERS or Fidelity or AIG.

But these efficiencies aren't at the 5%-extra-return kind of level. It's
not as if the institutional market isn't well-developed - actually, it's
huge, with many participants. If there's a low-risk 10% sitting out
there it'll rapidly trade its way into being a 5.8%, or whatever,
instrument.

[I think a good visual display of this is in the daily Wall St Journal
where you can see some Treasury and agency issues listed by maturity
with effective yields, based on recent trade prices. You don't need to
graph it all to see how they fit neatly into a yield curve. There may be
a small blip here or there but the "no free lunch" aspect of low-risk
fixed income is apparent. If there are enough high-grade corporates
listed this should be visible there as well. But try calling your
broker and getting your hands on those! Most of this stuff just isn't
traded much at the retail level.]

Also, there are debt instruments that have different risks associated
with them, that pay higher yields than the typical corporate, gov't, or
agency bonds, and that sell mostly (or only) outside of retail markets.
A manager may be able to boost yields with these, but of course, each
comes with additional risks - liquidity, default, etc. If there are any
free rides in fixed income, there's a lot of money waiting there to
pounce on it. So high-yield invariably (using that word precisely) comes
with a mundane explanation.

But you might have a belief in a manager's ability to analyze fixed
income and make better decisions about the issues' risks. Using that
mortgage pool example, maybe an issue is priced as if it will be called
by Date X but if repayments aren't at a certain pace it will be called
by Date Y, resulting in a higher yield till call; the manager buys and
is right about it. But that raises the general active-management problem
- you need to find someone who is better at those decisions than the
thousands of other managers. They are out there, and you're rewarded if
you find one, but it's a matter of identifying them in advance.

Last point - I think much of the financial services industry thrives on
the public's belief that there is a cluster of insiders with greater
access, greater knowledge, greater returns...and if you're lucky, you'll
be let in (at a cost).

Then again there's that other thread going about the old
actively-managed stock fund vs. S&P 500 index debate. And really, the
debate is about the efficiency of markets, whether stocks, fixed income,
or 12-packs of Coke. Caveat emptor.

-Tad

TooTall,

I appreciate your sticking with this discussion. I'm getting a lot out of it.

If you're game, I would be very interested in the details of any REMIC bond
purchase you made **in the past year**. Namely:

1. Price you paid for the REMIC bond
2. Interest paid to your account from this REMIC bond and how often this
interest is paid to your account
3. Coupon
4. Actual yield
5. Fees or commissions of any kind paid to your bond manager in the transaction.

I don't know if 1-5 are easily extracted from your account statements or not.

I won't be offended if you say you don't want to ask your bond manager for this
information or go to the trouble. But further thanks for any further trouble you
do go to.

I'm asking as I'm weighing whether it would pay for me to have a bond manager.
Right now I think I can do as well making my own choices with discount brokers'
offerings of corporate bonds and municipal bonds as well as buying Treasuries at
Treasury Direct.

I skimmed many web sites that discuss REMICs. Not to be pedantic, but rather
just to give further meat to the discussion, some remarks:

Right now to me, REMICs are

- mortgage-backed securities ("MBS")
- structured so as to minimize risk (in general), yet are highly vulnerable to
interest rate changes?
- CUSIP-identified and are generally said to be a type of bond
- have tax ramifications somewhat different (but nothing shocking) than a
corporate bond
- generally not as readily accessible as corporate bonds. Brokers seem to be
necessary?

Regarding REMIC yields in general, I found the following:

"MBSs have traditionally provided returns that exceed those of most other
fixed-income securities of comparable quality.[Source: The Bond Market
Association] MBSs are often priced at higher yields than Treasury and corporate
bonds of comparable maturity and credit quality."

http://www.frbsf.org/publications/co...ra02-2/mbs.pdf (the
author works for the
National Business Development Securities Sales and Trading Group, Freddie Mac)

But then there are warnings like the following (from a 2002 google post):
---
The traditional problem [with MBS] is payback risk: in the US, when interest
rates drop, mortgage holders refinance, and the MBS holder is left
getting cash back involuntarily just when the rate to reinvest is
dropping. I see from the web references below that you can choose
whether to bear that risk, in Canada.

It's like holding a callable corporate bond: just when you are
congratulating yourself for getting an above market interest rate,
whoosh the company comes and calls in its bond, and hands you cash you
can only reinvest at lower rates.
---

Still, this warning is nothing shocking. It makes sense.

A fair amount of commentary also appears on how REMICs are derivatives. The
inherent complexity of derivatives frightens some people away, as perhaps it
should. As many of the posts say, it's a good rule never to invest in that which
one does not understand fully. On the other hand, a proper and legal prospectus
of a particular REMIC may make the terms and risks very clear.

At the Fannie Mae site, I eventually got to some CUSIP's of some REMICS. For
example:

CUSIP 313920HH6
Matures 01/01/2009
Coupon 6.22000%

I group.googled for "remic OR remics" on all the misc.invest.* groups. Unless I
made a mistake, I got only 11 hits. If you're not on top of all the implications
of REMICs, it sounds like you're in good company. CMOs legally may be used
interchangeably with "REMIC." Many more hits come up when searching for "CMO OR
MBS."


"TooTall" <TooTall[at]TooTall.com> wrote
- quote -