Thursday, July 10, 2008

Dear MS, I liked your post so much that I took the liberty and published it, along with (very) few clarifications to my original post

Dear Blogger

although i tend to agree with most of your thoughts, i also have to play the devil's advocate,

1) Financials may be finding an artificial floor, but keep in mind that this floor is being set, or sponsored by, as you mentioned, the Fed. Effectively, that means the Fed will be printing money to cover up losses from irresponsible lending practices - which is directly converted into inflation. Inflation means the dollar in your pocket has less purchasing power. Therefore, YOU, and me, and all of the tax payers and USD holders are buying BSC, and eventually LEH, MER, C(?), etc. Well, if you are already buying, indirectly, the financial sector, by simply holding your USD, why do you want to increase your exposure? you ARE already long Financials - so if banks recover, USD recover, and you make $$. Don't double the trades that are losing, but the ones that are winning.. that s one of my first trading rules.

2) Munis: I also like the munies, and although you have been looking into project bonds - which may not be directly affected by the Real Estate burst, municipalities are, by nature, highly correlated to the Real Estate market. So, when buying munies, aside from the tax incentives, you have to have a clear oppinion that the Real Estate prices will not decline more. Sure that, if MTM is not an issue (as you plan to hold it to maturity), then the risk becomes more binary (will they be solvent and pay at the end, or not). Also, if you don't make mark to market of the positions, the pain and suffering from mark losses decreases a lot. The downside is that you may decide to reconsider it when it might be too late!

Because I agreee with the comment, I should have clarified that I tend to have diversified positions in high-quality revenue bonds. Some examples include Princeton University, NJ Wastewater and the Robert Wood Johnson hospital in Hamilton. I would also never invest in a Bond Fund, which does have to mark to market, potentially producing fluctuations that I have no interest in following. I do however try to somewhat mitigate the inherent inflation risk with somewhat of a ladder, even if I do not like sacrificing too much yield.

3) Hybrids: falls into the same category of 1), and i do have the same thoughts. Altough the Fed intervention makes debt much safer then equity - as we've seen with BSC. However, you may have the coupons cancelled for a while - if they decide not to pay dividends.

4) SP: agree. But also agree that "past performances are no guarantee of future returns". Since i am not traditionally an equities investor, i can't add any valuable thoughts here..

by the way, love the comments on the Bubbles. i guess that summarize really what i think - and how i am invested right now (as i think we are through an economic - not sector - bubble burst). My main concern right now is not to find nice returns, but to maintain wealth.

To finalize, here is a good quiz:

What was the only asset that didn't lose value during the WW2?
a) Real Estate/Land
b) Gold
c) Oil
d) Wine well, let's just say that we tried few of the best examples of the answer the last weekend...

On this very wise quiz, here is a fascinating link featuring Jim Cramer and Gary Vainerchuck... Time to buy Ports?

Have a good one!MS

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