While January for most of us brings the uphill battle of working off all the food and cocktails of the Holiday Season, a little bright side are the post-holiday sales. That blender you weren't hoping to find under the tree can be exchanged for an item that orginally was worth even more than said wonderous blender. Or maybe you're like me and were holding out to get those shoes until they went on sale after the holidays. Either way, January is usually a month to take advantage of marked down items. Unfortunately this happens everywhere except the bond market. "The January Effect" as it's become known is due to the fact that January is the most expensive month to buy a bond. The basic reason for this is the supply-demand ratio is off, demand for municipal bonds takes a big jump in January.
Most large companies close their books the last 2 weeks in December so that when January First rolls around they have a ton of cash on hand. They need to put that money to work so these large companies start buying up bonds by the handful (which really means by the million). This puts quite a dent in the supply of bonds on the market.
Aside from the large institutions buying up bonds, there are a lot more bonds that mature in January as opposed to any other month. So in addition to the institutions needing to place their cash in bonds, after having their bonds called or mature, individuals need to replace that money too.
Since January is a big month for maturities and calls, it stands to reason that it is also a large interest paying month. Again, people are looking for bonds to place their interest in.
The best thing to do if you know you have a bond coming due in January or expect a large interest payment is to look for a bond in December and ask your broker for an extended settlement date. This way you can take advantage of the Holiday bond sale in December (AKA people selling their bonds for tax loss purposes). Happy bargain hunting!
Tuesday, December 29, 2009
Monday, December 21, 2009
Guam : My Favorite Accessory
Everyone has their favorites. It could be sunglasses, shoes, sweaters, or dresses, everyone has certain preferences for specific items, whether it be attire, brands, or bonds. With brands we love what we think makes us look and therefore feel best and it's the same with bonds. We buy what makes us feel secure with the best rate we can get. Personally when it comes to accessories, whether it be shoes or bags, Miu Miu is hands down my favorite. While this may not be for everyone, seeing as most women would choose Christian Loubouton or Manolo Blahnik for their favorite shoes, for years Miu Miu has been my favorite for their style and comfort. That being said, for the past couple years Guam has been my favorite bond. Below are the reasons why. While Guam may not be the style (bond) you're looking for due to various personal perferences (rating being the main one), we all walk in and carry our own favorites and this is as they say, what makes a croc er, horse race.
Guam is a territory of the United States. It was originally part of Spain, when the US won it over in 1898. It remained a US Territory until 1941 when shortly after Pearl Harbor, Japan took it over for a little longer than 2 years that was a devastating time for the people living there. In 1944 the US took it back over and it has remained a US territory ever since. Due to it's dramatic history, a Guam general obligation is rated B+ (recently upgraded from B). The highest rated type of Guam bond is their Power Revenue bonds which are rated Ba1 by Moodys and BBB- by S&P.
Guam's main source of income is tourism from people living in Japan that use it as a vacation spot similarly to how people in the US visit Hawaii. It's second largest source of income is from the US Government. Recently the amount of money the United States is putting into Guam has really jumped. The Japanese civilians have grown tired of our marine bases in Okinawa seeing as there have been numerous incidents of servicemen committing crimes. So our entire marine base that is in Okinawa is now moving to Guam. That being said, there is a lot of constuction creating housing for the servicemen moving there. The government has also put a huge amount of money into the Ports in Guam. Over the past year it's no secret that US employment has taken a nose dive. This is true for everywhere except Guam. Guam is currently hiring in case anyone is looking for a climate change. As far as the Guam Airport is concerned, money goes directly from the US Government to the Guam Airport seeing as it is currently the only way on and off the island. Aside from all the constuction that has been taking place along with the funds going to Guam, it's location is such an important place for the US to be right now. It is the closest base we have on US soil to China and the Middle East. The more our world becomes a global community, the more important it will be for the US to have easy access to our neighbors.
If you are a conservative buyer I would not suggest Guam. It's rating will probably bother you. But if you are looking for a good buy and the facts make sense to you as oppose to the bonds rating (which doesn't make much sense to me) it's a bond to take advantage of. It's almost like getting a great pair of Miu Miu shoes at an outlet; just because someone else didn't want them doesn't mean that they wouldn't be great for you! The fact that someone else didn't want the shoes (bonds) makes the price just about as pretty as what you're buying!
Guam is a territory of the United States. It was originally part of Spain, when the US won it over in 1898. It remained a US Territory until 1941 when shortly after Pearl Harbor, Japan took it over for a little longer than 2 years that was a devastating time for the people living there. In 1944 the US took it back over and it has remained a US territory ever since. Due to it's dramatic history, a Guam general obligation is rated B+ (recently upgraded from B). The highest rated type of Guam bond is their Power Revenue bonds which are rated Ba1 by Moodys and BBB- by S&P.
Guam's main source of income is tourism from people living in Japan that use it as a vacation spot similarly to how people in the US visit Hawaii. It's second largest source of income is from the US Government. Recently the amount of money the United States is putting into Guam has really jumped. The Japanese civilians have grown tired of our marine bases in Okinawa seeing as there have been numerous incidents of servicemen committing crimes. So our entire marine base that is in Okinawa is now moving to Guam. That being said, there is a lot of constuction creating housing for the servicemen moving there. The government has also put a huge amount of money into the Ports in Guam. Over the past year it's no secret that US employment has taken a nose dive. This is true for everywhere except Guam. Guam is currently hiring in case anyone is looking for a climate change. As far as the Guam Airport is concerned, money goes directly from the US Government to the Guam Airport seeing as it is currently the only way on and off the island. Aside from all the constuction that has been taking place along with the funds going to Guam, it's location is such an important place for the US to be right now. It is the closest base we have on US soil to China and the Middle East. The more our world becomes a global community, the more important it will be for the US to have easy access to our neighbors.
If you are a conservative buyer I would not suggest Guam. It's rating will probably bother you. But if you are looking for a good buy and the facts make sense to you as oppose to the bonds rating (which doesn't make much sense to me) it's a bond to take advantage of. It's almost like getting a great pair of Miu Miu shoes at an outlet; just because someone else didn't want them doesn't mean that they wouldn't be great for you! The fact that someone else didn't want the shoes (bonds) makes the price just about as pretty as what you're buying!
Monday, December 7, 2009
Impostors!
This weekend I went on a 'walk' which is recession code for shopping these days and I came across this beautiful sweater that was 75% off. I immediately grabbed it and tried it on and was going to buy it when as I was carrying it to the register, I noticed a hole in it. Of course I put said sweater back and kept 'walking'. This got me thinking though, what if I had bought the sweater and then realized that it had a hole in it when I got home? I would have been screwed. This can actually happen with bonds as well. Below is a list of flawed bonds with descriptions of why these securities belong on Canal Street as opposed to in your portfolio.
COPs : Certificates of Participation (COPs) are bonds that can be brought into the market without a vote. When you're dealing with a regular municipal bond, for the issuer to bring the bonds onto the market, individuals vote on the issue and if enough people vote 'no' the issue will not be brought onto the market. COPs do not have to be voted on meaning that the issuer can bring out a bond issue, even if it's not in the best financial place to do so. What makes these bonds such poor quality is that instead of being supported by a specific revenue, a committee meets annually to appropriate funds for the payout of these bonds. This committee is also legally able to decide not to appropriate funds should the issuer have financial trouble. In economic hard times like we're in, it's likely many COPs will decide not to pay out and the holders of these bonds will be left out in the cold with nothing to keep them warm except a sweater with holes in it.
Notes of Anticipation : Notes of Anticipation are often passed off as regular bonds when in fact they are far from the quality of true bonds. Notes of Anticipation means that the revenue to pay them is not factored into the issuer's budget, the bonds are payable from anticipated (as in what they hope or plan to get) revenue. Whether we are in a recession or not, I do not think it's wise to buy a bond where you have to hope the issuer makes certain revenues to pay for your bond. You may have heard about Orange County CA defaulting a few years ago. Orange County CA bonds were fine, it was their notes that defaulted. While you may not need a sweater in Orange Co. CA, you get the idea...
Tobacco Bonds : Many states have bonds that are Tobacco Settlement bonds. These bonds are not actual bonds of the town or county or state that these bonds are in, they are backed by the cigarette companies. Basically the cigarette companies lost a bunch of law-suits for selling something that gave a bunch of people cancer, they needed money to pay for these suits, so they issued bonds. The fact of the matter is that with more and more people quitting smoking along with the tobacco companies continuing to lose law-suits, how long will these companies stay in business and have the money to pay off their debt? If you really think that these tobacco companies are worth their salt, er, tobacco, you should buy their coporate bonds. At least that way you'll know exactly what's backing your money.
Natural Gas Bonds : Municipal bonds that are natural gas bonds are not essential service revenue bonds meaning they are not payable from everyone's gas bills. In fact, they're not supported by any gas at all. These bonds are obligations of a financial institution. If you happen to buy a natural gas bond that's backed by Goldman, then you're sitting pretty, for those people who happened to buy natural gas bonds that were backed by Lehman, never mind a sweater with holes, they're pretty much working with a few shreds of yarn. These bonds are now worth about 3 cents on the dollar which really stinks for anyone who bought them around 90. Similar to the tobacco bonds, if you're going to buy a natural gas bond, find out which financial institution actually supports it and buy their corporate bonds. This way you'll be fully aware of how much risk you're taking.
AMT Bonds : The Alternative Minimum Tax was put in place in 1986 as a tax on people with a lot of deductions. Since the rate has stayed the same since 1986, with inflation along with bracket creep, more and more people fall into the AMT every year. If you are in the AMT and buy a bond that is subject to it, your investment will essentially be taxable. Even if you are not in the AMT, I would be careful when buying these bonds because you could fall into it with in the next few years.
While these bonds are always on sale meaning that you can get them for much cheaper than regualr bonds, each of them comes with a price. Usually that price is quality. So if you're looking to buy a municipal bond and the price seems too good to be true, take a second look, your investment probably has a hole in it.
COPs : Certificates of Participation (COPs) are bonds that can be brought into the market without a vote. When you're dealing with a regular municipal bond, for the issuer to bring the bonds onto the market, individuals vote on the issue and if enough people vote 'no' the issue will not be brought onto the market. COPs do not have to be voted on meaning that the issuer can bring out a bond issue, even if it's not in the best financial place to do so. What makes these bonds such poor quality is that instead of being supported by a specific revenue, a committee meets annually to appropriate funds for the payout of these bonds. This committee is also legally able to decide not to appropriate funds should the issuer have financial trouble. In economic hard times like we're in, it's likely many COPs will decide not to pay out and the holders of these bonds will be left out in the cold with nothing to keep them warm except a sweater with holes in it.
Notes of Anticipation : Notes of Anticipation are often passed off as regular bonds when in fact they are far from the quality of true bonds. Notes of Anticipation means that the revenue to pay them is not factored into the issuer's budget, the bonds are payable from anticipated (as in what they hope or plan to get) revenue. Whether we are in a recession or not, I do not think it's wise to buy a bond where you have to hope the issuer makes certain revenues to pay for your bond. You may have heard about Orange County CA defaulting a few years ago. Orange County CA bonds were fine, it was their notes that defaulted. While you may not need a sweater in Orange Co. CA, you get the idea...
Tobacco Bonds : Many states have bonds that are Tobacco Settlement bonds. These bonds are not actual bonds of the town or county or state that these bonds are in, they are backed by the cigarette companies. Basically the cigarette companies lost a bunch of law-suits for selling something that gave a bunch of people cancer, they needed money to pay for these suits, so they issued bonds. The fact of the matter is that with more and more people quitting smoking along with the tobacco companies continuing to lose law-suits, how long will these companies stay in business and have the money to pay off their debt? If you really think that these tobacco companies are worth their salt, er, tobacco, you should buy their coporate bonds. At least that way you'll know exactly what's backing your money.
Natural Gas Bonds : Municipal bonds that are natural gas bonds are not essential service revenue bonds meaning they are not payable from everyone's gas bills. In fact, they're not supported by any gas at all. These bonds are obligations of a financial institution. If you happen to buy a natural gas bond that's backed by Goldman, then you're sitting pretty, for those people who happened to buy natural gas bonds that were backed by Lehman, never mind a sweater with holes, they're pretty much working with a few shreds of yarn. These bonds are now worth about 3 cents on the dollar which really stinks for anyone who bought them around 90. Similar to the tobacco bonds, if you're going to buy a natural gas bond, find out which financial institution actually supports it and buy their corporate bonds. This way you'll be fully aware of how much risk you're taking.
AMT Bonds : The Alternative Minimum Tax was put in place in 1986 as a tax on people with a lot of deductions. Since the rate has stayed the same since 1986, with inflation along with bracket creep, more and more people fall into the AMT every year. If you are in the AMT and buy a bond that is subject to it, your investment will essentially be taxable. Even if you are not in the AMT, I would be careful when buying these bonds because you could fall into it with in the next few years.
While these bonds are always on sale meaning that you can get them for much cheaper than regualr bonds, each of them comes with a price. Usually that price is quality. So if you're looking to buy a municipal bond and the price seems too good to be true, take a second look, your investment probably has a hole in it.
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