Traderbill's Financial Markets Weblog

…TB feels that it might be time to buy corporate bonds…selectively of course and only investment grade at this time. As a bond geek he has not spent as much time on the fixed income side of the equation and it is incredibly important here…after all we have now learned that utility stocks are not bonds.

For the private investor, and money managers who have to buy for small individual accounts, since one blow up can destroy your entire performance, TB sees ETF’s as a good way to go. He doesn’t much like bond funds due to fees of 75 to 100 basis points or more…some with 12(b)1 fees which you should avoid like the plague many with front and or back loads…stay strictly no load. Why should you have to pay a back load to a manager you want to fire for poor performance? A client prospect of TB’s bought two mutual funds and asked for TB’s opinion on them…after the fact of course…they always ask after the fact. Both had relatively high fees, 12(b)1 fees for the broker, and a back-load. Since both funds were rated positively he advised of the back load and said you would do well to just hang on. Since then both funds have fallen sharply with the market but other than the loads TB has no problem with them.

We all know of PIMCO’s great bond performance and perhaps they were number one last year, while their competitor Western Asset’s Corp Bond Fund produced just a 1.58% return lowering their three year return to just 3.04%. TB researched this because he heard a WA spokesman say they had poor performance due to an over-allocation to high yield bonds (junk bonds). So TB looked and they only had 7% junk bonds at the end of the 3rd quarter but the intermediate index had none. Also, they were sharply underweight US treasurys so PIMCO had them on both counts…that is how you destroy returns.

A friend, and old time bondo works for a public pension fund. He told TB that although they have several hundred million with them any complaints are dissed as they have their own cookie cutter (in TB’s humble opinion) strategy.

Prior to the dotcom bust Metropolitan West had phenomenal performance. They too had lower investment grade bonds  …including Qwest Communications and according to P&I were warned by the consultants that they should cut their exposure at least if they wouldn’t close out the positions…they held more than 5% of Qwest if TB recalls correctly and balked at this, ignoring the number one rule of business: the client is always right. Suddenly, they decimated 3 or possibly 5 years of sterling performance…on ego. TB was researching it and found that the CEO was Gary Rupert, oddly the man who had been chief credit officer at Merrill when TB was there and an excellent analyst. Rupert had written a memo to management to cut exposure to Orange County which was ignored…greed again. So even a guru can make a major mistake…that is what happens when you don’t listen to clients. As a client, TB would move my money from any manager who ignored my concerns and couldn’t give me a good reason why they were right. Met West was bought out by Wachovia and is now a large third party lender…that is Rupert’s forte…a good man and smart that had a temporary contempt of client phase.

The above thoughts were enhanced by a rereading of all three parts of the 1/4/08 Barron’s Roundtable in which Bill Gross played a major role as the only bond geek…and shamelessly plugged PIMCO’s two bond funds (investment grade and one that includes junk). But he added a caveat, giving the price and the DISCOUNT to Net Asset Value…since then both have gone to a premium: the investment grade to a 10% premium and the broader one to a 6.7% premium…his advice is good. In fact, IF you were to buy a bond fund TB would recommend one of the Western Asset Management funds instead which are trading at discounts of 9% to 12.8% to the NAV…past performance is no guarantee of…anything! Gross also recommended GM 8.375% bonds due in 2033 yielding 11.5% and F 8.90% due 2032 yielding 12.5%. Three weeks later the prices (74 and 72 respectively) are very close to where they were then. Two things to consider: markups if you are not an institutional investor and diversification. Bonds of the fallen angel financial institutions offer good returns too but don’t be in any hurry to buy them or most junk bonds either…time is on your side…yes it is.

TB could have written volumes today as he did so much reading and none of it was positive. It is hard to imagine a set of conditions any worse than we have today (TB resists the temptation to say perfect storm)…the least of which is not that it is an election year…in fact that is TB’s major concern…a quick look at the oral stimulus…oops fiscal stimulus package is all too telling. Once again the GOP is shooting itself in the foot by trying to give more to the wealthy (and it will cost them dearly), having learned nothing from the 2001 tax cuts. Investment is not fiscal stimulus. Checks and food stamps to the middle class and lower income groups are but grocery stores are not a big part of the economy. You have not heard the end of this…you will for weeks and months…and meanwhile the economy wanes. Finally, shame on Sen. Dodd, the presidential wannabe…in sheer partisan manner he is refusing to allow his committee to approve the appointments of two proposed Fed governors even as two more will be departing soon. Both are qualified and could bring new viewpoints. Can you believe this of a presidential hopeful who fortunately won’t make the cut! What a great time to tie the hands of the Fed! Idiot!

The rest of the week will be on the economic concerns TB read of last weekend…and it won’t be pretty.