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IDS World Markets Fri 13th February 09


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Bad morning in AAV land this morning. Divy cut to 4 cents from 8 cents.

 

At current price that's still about 15%

 

 

big.chart?symb=aav&compidx=aaaaa:0&ma=0&maval=9&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=694275&style=320&time=18&freq=9&comp=NO_SYMBOL_CHOSEN&nosettings=1&rand=7469&mocktick=1

 

 

 

I reentered, looking for a run-up during contango contract change over

 

and because it's completely illogical,

 

and that makes about as much sense as anything else lately.

 

Totally agree.

There NG reserves are now enormous relative to the share price.

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I was in a store last evening and ended up shopping near an older couple who were obviously trying to make their few dollars go as far as they could.

 

As I got near it sounded like the husband wanted badly to get a case of beer and the misses didn't think that was within their budget.

 

As the discussion slowed, she reached up to the shelf and pulled down a bottle of face cream.

 

The husband immediately reacted, "If we don't have money for beer, why are you getting face cream?"

 

"I need it, it makes me look pretty." she replied.

 

"Yeah well, that's why I wanted the case of beer, and it's half the price."

 

 

 

 

 

 

 

It's all so sad.

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TJ- Could you give that brief splanation of why buying stocks makes no sense relative to bonds.

 

It goes something like this, and by the way, by bonds I am assuming you mean corporates, as T-bags ® (bills, notes, bonds) are "100% gar-run-teed" and thus are at the absolute end of the risk spectrum.

 

Speaking historically, folks would buy stocks for two reasons, [1] capital appreciation (consisting of econimic expansion + growth in the specific company sector + claim on earnings) and [2] dividend income. In fact, over most periods (as measured in decades) the return from the dividend component assuming reinvestment, is equal to or more than, the return from capital appreciation. This theory holds just fine for periods of economic expansion, and periods of expansion laced with the occassional economic hiccup (mild recession).

 

But from an accounting/legal standpoint things are quite different.

 

Equity holders are last in line of the capital structure from first to last:

 

[1] DIP (debtor in posession financing, assuming worse case BK restructuring scenario)

[2] Senior secured debt

[3] Unsecured debt

[4] Mandatory preferred shares (have to pay divs)

[5] Cumulative preferred shares (can accumulate divs if cash tight)

[6] Common stock

 

So in this environment common stock makes less sense to use as an "investment" than as a "betting chip." So while one can still "buy stocks" and make money, it is not investing in the traditional sense, but more like betting -- and the duration of those bets have contracted dramatically, from years during a traditional expansion economic cycle to months, days and minutes in our current environment.

 

More and more, "investors" are coming to the realization that stocks are indeed extremely risky and can result in an extended if not permanent impairment of capital (thimk BK). Thus, an "investment" should be able to [1] preserve capital via a claim on assets, and [2] generate income.

 

That's where corporate debt comes in.

 

Corporate debt accomplishes the two important conditions above, and it also stands above [1] stocks price depreciation, [2] dividend cuts/elimination, [3] preferred share depreciation & dividend restriction. The interest payment on debt is THE LAST THING TO GO before bankruptcy. Sure, once in BK, there are no bond interest payments while going through the process, but on the other hand everyone else has been zeroed out FOREVER. After BK, usually 6-12 months, assuming the company was doing a restructuring the debt holders will emerge with new debt (albeit a fraction of what they held before) and most if not all of the equity in the new firm. Recovery on debt is in a range of 30-70% on the origianl investment dollar assuming you bought the bonds at face ($1,000 per bond or 100%). If you bought the bonds distressed, then you can have returns of well over 100%, even as high as 1000% over time. However, in a liquidation recovery can approach zero.

 

Currently, the corporate debt market is offering insane yields (8-50% annually depending on risk), but with good reason, as the level of deaults is increasing by the day (I own bonds in several recently BK companies: Pilgrims, Aleris, Tribune, Constar, to name a few). Meanwhile the influx of cash being put to work is increasing dramatically, and while I don't have stats at the ready, there is almost not a day that goes by where the WSJ is not discussing all the new money going into the corporate debt market.

 

So how can one get involved?

 

You can by bonds in individual companies (like I do) through any major broker (I use Fidelity). You can either just browse their inventory or call their fixed income desk should you have a specific bond you are looking for. However, two of the easiest ways to play the high-yield market are the ETF's HYG and JNK. Other corporate debt mutual funds and ETF are also available.

_______________________

Remember that stocks are really just a derivative -- that's right -- a derivative whose value is "derived" from company earnings, hence the focus on measures such as P/E multiples and PEG ratios as a way to "measure" relative value.

 

Can money be made trading stocks? Absolutely!

 

Can money be made by buying and holding stocks? Absolutely!

 

Do most folks have the time to trade stocks or properly analyze & monitor individual stocks? No way!

 

Bottom line on long term holdings: [1] MAKE SURE YOU ARE GETTING PAID TO WAIT, [2] MAKE SURE YOU HAVE A "REAL CLAIM ON ASSETS" rather then a percieved "CLAIM ON EARNINGS"

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It goes something like this, and by the way, by bonds I am assuming you mean corporates, as T-bags ? (bills, notes, bonds) are "100% gar-run-teed" and thus are at the absolute end of the risk spectrum.

 

Speaking historically, folks would buy stocks for two reasons, [1] capital appreciation (consisting of econimic expansion + growth in the specific company sector + claim on earnings) and [2] dividend income. In fact, over most periods (as measured in decades) the return from the dividend component assuming reinvestment, is equal to or more than, the return from capital appreciation. This theory holds just fine for periods of economic expansion, and periods of expansion laced with the occassional economic hiccup (mild recession).

 

But from an accounting/legal standpoint things are quite different.

 

Equity holders are last in line of the capital structure from first to last:

 

[1] DIP (debtor in posession financing, assuming worse case BK restructuring scenario)

[2] Senior secured debt

[3] Unsecured debt

[4] Mandatory preferred shares (have to pay divs)

[5] Cumulative preferred shares (can accumulate divs if cash tight)

[6] Common stock

 

So in this environment common stock makes less sense to use as an "investment" than as a "betting chip." So while one can still "buy stocks" and make money, it is not investing in the traditional sense, but more like betting -- and the duration of those bets have contracted dramatically, from years during a traditional expansion economic cycle to months, days and minutes in our current environment.

 

More and more, "investors" are coming to the realization that stocks are indeed extremely risky and can result in an extended if not permanent impairment of capital (thimk BK). Thus, an "investment" should be able to [1] preserve capital via a claim on assets, and [2] generate income.

 

That's where corporate debt comes in.

 

Corporate debt accomplishes the two important conditions above, and it also stands above [1] stocks price depreciation, [2] dividend cuts/elimination, [3] preferred share depreciation & dividend restriction. The interest payment on debt is THE LAST THING TO GO before bankruptcy. Sure, once in BK, there are no bond interest payments while going through the process, but on the other hand everyone else has been zeroed out FOREVER. After BK, usually 6-12 months, assuming the company was doing a restructuring the debt holders will emerge with new debt (albeit a fraction of what they held before) and most if not all of the equity in the new firm. Recovery on debt is in a range of 30-70% on the origianl investment dollar assuming you bought the bonds at face ($1,000 per bond or 100%). If you bought the bonds distressed, then you can have returns of well over 100%, even as high as 1000% over time. However, in a liquidation recovery can approach zero.

 

Currently, the corporate debt market is offering insane yields (8-50% annually depending on risk), but with good reason, as the level of deaults is increasing by the day (I own bonds in several recently BK companies: Pilgrims, Aleris, Tribune, Constar, to name a few). Meanwhile the influx of cash being put to work is increasing dramatically, and while I don't have stats at the ready, there is almost not a day that goes by where the WSJ is not discussing all the new money going into the corporate debt market.

 

So how can one get involved?

 

You can by bonds in individual companies (like I do) through any major broker (I use Fidelity). You can either just browse their inventory or call their fixed income desk should you have a specific bond you are looking for. However, two of the easiest ways to play the high-yield market are the ETF's HYG and JNK. Other corporate debt mutual funds and ETF are also available.

_______________________

Remember that stocks are really just a derivative -- that's right -- a derivative whose value is "derived" from company earnings, hence the focus on measures such as P/E multiples and PEG ratios as a way to "measure" relative value.

 

Can money be made trading stocks? Absolutely!

 

Can money be made by buying and holding stocks? Absolutely!

 

Do most folks have the time to trade stocks or properly analyze & monitor individual stocks? No way!

 

Bottom line on long term holdings: [1] MAKE SURE YOU ARE GETTING PAID TO WAIT, [2] MAKE SURE YOU HAVE A "REAL CLAIM ON ASSETS" rather then a percieved "CLAIM ON EARNINGS"

 

Tanks TJ-Good stuff. I posted it on WSE too.

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KW giving you props on silver. I thought it would at least make a bolder attempt at 14 but stalled. You da man . . .

 

Ditto....

 

That thing sat parked on $13.50 like a child molester in front of a middle school......before the 200-day cops came and chased it away....

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It goes something like this, and by the way, by bonds I am assuming you mean corporates, as T-bags ? (bills, notes, bonds) are "100% gar-run-teed" and thus are at the absolute end of the risk spectrum.

 

Speaking historically, folks would buy stocks for two reasons, [1] capital appreciation (consisting of econimic expansion + growth in the specific company sector + claim on earnings) and [2] dividend income. In fact, over most periods (as measured in decades) the return from the dividend component assuming reinvestment, is equal to or more than, the return from capital appreciation. This theory holds just fine for periods of economic expansion, and periods of expansion laced with the occassional economic hiccup (mild recession).

 

But from an accounting/legal standpoint things are quite different.

 

Equity holders are last in line of the capital structure from first to last:

 

[1] DIP (debtor in posession financing, assuming worse case BK restructuring scenario)

[2] Senior secured debt

[3] Unsecured debt

[4] Mandatory preferred shares (have to pay divs)

[5] Cumulative preferred shares (can accumulate divs if cash tight)

[6] Common stock

 

So in this environment common stock makes less sense to use as an "investment" than as a "betting chip." So while one can still "buy stocks" and make money, it is not investing in the traditional sense, but more like betting -- and the duration of those bets have contracted dramatically, from years during a traditional expansion economic cycle to months, days and minutes in our current environment.

 

More and more, "investors" are coming to the realization that stocks are indeed extremely risky and can result in an extended if not permanent impairment of capital (thimk BK). Thus, an "investment" should be able to [1] preserve capital via a claim on assets, and [2] generate income.

 

That's where corporate debt comes in.

 

Corporate debt accomplishes the two important conditions above, and it also stands above [1] stocks price depreciation, [2] dividend cuts/elimination, [3] preferred share depreciation & dividend restriction. The interest payment on debt is THE LAST THING TO GO before bankruptcy. Sure, once in BK, there are no bond interest payments while going through the process, but on the other hand everyone else has been zeroed out FOREVER. After BK, usually 6-12 months, assuming the company was doing a restructuring the debt holders will emerge with new debt (albeit a fraction of what they held before) and most if not all of the equity in the new firm. Recovery on debt is in a range of 30-70% on the origianl investment dollar assuming you bought the bonds at face ($1,000 per bond or 100%). If you bought the bonds distressed, then you can have returns of well over 100%, even as high as 1000% over time. However, in a liquidation recovery can approach zero.

 

Currently, the corporate debt market is offering insane yields (8-50% annually depending on risk), but with good reason, as the level of deaults is increasing by the day (I own bonds in several recently BK companies: Pilgrims, Aleris, Tribune, Constar, to name a few). Meanwhile the influx of cash being put to work is increasing dramatically, and while I don't have stats at the ready, there is almost not a day that goes by where the WSJ is not discussing all the new money going into the corporate debt market.

 

So how can one get involved?

 

You can by bonds in individual companies (like I do) through any major broker (I use Fidelity). You can either just browse their inventory or call their fixed income desk should you have a specific bond you are looking for. However, two of the easiest ways to play the high-yield market are the ETF's HYG and JNK. Other corporate debt mutual funds and ETF are also available.

_______________________

Remember that stocks are really just a derivative -- that's right -- a derivative whose value is "derived" from company earnings, hence the focus on measures such as P/E multiples and PEG ratios as a way to "measure" relative value.

 

Can money be made trading stocks? Absolutely!

 

Can money be made by buying and holding stocks? Absolutely!

 

Do most folks have the time to trade stocks or properly analyze & monitor individual stocks? No way!

 

Bottom line on long term holdings: [1] MAKE SURE YOU ARE GETTING PAID TO WAIT, [2] MAKE SURE YOU HAVE A "REAL CLAIM ON ASSETS" rather then a percieved "CLAIM ON EARNINGS"

Very helpful -- tanks, TJ. :)

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