Picasso

That is what I am trying to figure out. I think of it like this: Allianz was at 52 week highs trading at 1.2 book value. The market price of Allianz was likely not inexpensive enough to take this risk into account. Had Bill Gross been hit by a bus, you would probably lose a lot less than $4 billion of market cap given the team he has behind him and the ability to better retain those assets. Easier to explain the departure of Bill Gross in that situation. Janus on the other hand has to deal with a new risk. Bill Gross is already quite older and the amount of tenure at Janus could be fairly limited. Also, if he was unable to create the right culture in the bond team at PIMCO, why would he at Janus? I would probably pay a smaller multiple for this since there are some serious exit valuation problems. All in all, the transition is going to be messy which will result in outflows to other bond firms such as LM (which is up today). If anything this could be a major opportuity for other firms to highlight their bond expertise and grab assets after Bill Gross has left a bad taste in their mouthes. So I don't think the market value gap between Allianz and Janus is that strange. But if Bill Gross can do a good job at Janus and live another 10 years or so, the stock is probably very undervalued.

Anyone run some potential valuations on JNS yet? Gundlach brought about $50B over with him, Gross might be able to pull in even more. I'm going to try to work on this today.

I think that is accurate because they are generating high yields, like 15% plus. So if a stock is at 90, they are selling puts at 85 or 87.5. Someone else is buying up the OTM puts.

Well I think this is the conventional thinking which is why there might be some mispricing. The two biggest assumptions are the fed put and company buybacks which have definitely worked the past several years. But if that is the case then these buyback stocks and a fed put should mean no bear market in these stocks for a long time. Not sure if that sounds logical although on the surface it can make sense on paper. Stocks do weird things. You're probably right, the odds of success are low. If you do have a big move it could make up for the low odds. I am going to try and run some different scenarios and see what I come up with.

I was also thinking along the same lines of buying these puts everyone is happy to be selling at extremely low volatiltiy levels. A bit more speculative than my investment philosophy but I have a sense now would be the time to do it. I have thought of this like the Japanese market. They have rates near zero but many stocks still trade for very low multiplies. If low rates and such always implied higher multiples, these stocks should be at 30x earnings no problem given the amount of time this spread has existed. I do not get the warm and fuzzies thinking that low rates and the end of QE is going to imply high multiples on stocks in the US. It could, but I think history has shown this is not always the case. In general I notice a lot of this put selling has to do with people convinced corporations with big cash hoards and low multiples are low risk investments. However that did not prevent Apple from dropping from 700 to 390 even with their giant cash hoard. Granted Apple is more cyclical than a KO or JNJ, but the investment thought is just as complacent.

CBOE Skew Index which bases the data on the S&P. I attached a chart but it goes out further in time.

This is a potentially hard question to answer as well as a possible discussion on the topic. I have noticed something a bit unusual the past several months that I never noticed in the past. I speak to a lot of retail investors (based on what I do for a living) and I have heard a ridiculous amount of times how they are selling puts, often naked without cash to cover, to create an income stream in the teens. There are special cringe words I hear such as "easy" "no-brainer" "fun" and worst of all "free money." Now normally I think this is a pretty standard thing to do, but this has been brought up more times than I can count. Because of low interest rates, this seems to have become a strategy to create income since the market has maintained a pretty solid bid. It sounds like a pretty sound strategy to sell puts on PG or MCD and create some income while you wait for the order to fill. However I remember what it is like to sell puts on something which is gapping down way below your stike. It causes a hell of a lot of panic once those levels bust through because people never thought they'd have to be assigned the stock. Then I started to notice large investment firms offer an option overlay to marginable accounts. So someone might have $5 million in stocks and they can overlay $2.5 million of collateral to sell calls and puts to create some extra income. This is becoming a popular strategy. In addition I have started to notice the skew on options pricing to be much more expensive on OTM than ATM. In fact the index I track is at the highest levels since most major market corrections. So I was wondering if anyone knew a way to track how much naked puts are out there or something similar to track the notional amount of market long exposure at certain prices? I have had some worries that the market is a bit more leveraged than it would otherwise seem and this could play one factor. I suspect there is no easy answer to this. I appreciate any input or reasons why I should not worry ;D

From 01/31/1997 to 09/12/2014: CSCO: 7.42% dividends reinvested, 6.91% without dividends reinvested KO: 4.36% dividends reinvested, 2.06% without dividends reinvested

A quick glance at these bonds and I don't quite see the trade or excessive value. CUSIP is 200300507 if anyone is interested. They trade at around 46 on the offer. Since they redeem at higher of principal (par value of 71.52) or conversion (8.51 of conversion value today) I would not bank on the value in the conversion. I would probably play S or CTL directly if I thought that conversion value would go up from 8.51 to above 71.52 per note. Although you get the upside on the stocks, that far out of the money with 15 years left is probably not worth much. I'm ball parking that value in the 0.20-0.40 region based on other convertible bonds that far out of the money with 15 years left. Softbank controls 80% of Sprint and will likely not be thinking of dividend payments in line with AT&T or Verizon. Masayoshi Son basically said this in a Charlie Rose interview. That eliminates some upside in the interest rate boost from underlying dividend increases. I am not familiar enough with CTL or their potential spin-off. The A- rated Comcast preferred trades at a 5% yield and these ZONES yield 6%. The preferred is ultra-long duration with a short call which might make the 5% yield a weak benchmark against the notes. Those will never quite get above $25 either. But the preferred has more liquidity and tax preference of QDI. If you assume similar credit quality on the ZONES, you get a bump in yield with less duration risk and some optionality that I think is mostly worthless. There is an almost 5% spread on the bid/ask so you better be happy with 6% or you'll be facing a stiff early sell penalty. I'm not quite sold on the thesis and in fact I wouldn't pay more than $40 for these notes since the sacrifice in liquidity to get a 6% yield is sort of crappy. I'd rather buy some Citigroup preferred and add some of the 106 strike warrants for 80 cents on a proportional basis to emulate this strategy. Then again those warrants will not go out to 2029 (and the ZONES are backed by CMCSA which is better than S/CTL) but I doubt I'd want to own bonds for 15 years with the hope of something beyond a 9 bagger in S/CTL. The longer the time frame for an early par takeout, the lower your CAGR as well.

Oh, got you! Yeah. That is the typical way Fidelity does business. What other brokers do this? I assume most brokers restrict clients when the price drops? :) Almost all of them do this. The corporate market is a bit different but in muni land, retail investors are trading like we are back in 1924.

Not letting customers buy obviously makes the situation worse. They were perfectly fine letting people buy when the price was much higher but all of a sudden when the price drops it becomes more speculative. That said, funding concerns similar to a bank run can develop in these types of bonds and it is much easier to sue brokerages over something like Puerto Rico. Risk management from a reputation and legal perspective. The way I make a market is complicated but it involves directly buying from individual sellers with the help of a trading desk to determine the price.

Good question about pricing. Probably my favorite part of municipal bond investing with distressed issuers. It goes something like this: Customer: Hey can you sell my bond? I read bad things in Barrons. Broker 1: Sure, we got a bid back at 70. This thing can go to 10 bucks so you should take it. Customer: Okay Meanwhile across another muni trading desk.... Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday. If anyone is offering thse bonds, pull down your bids to the low 70's. We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm). The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling. This is where you get good pricing. You follow bonds you know are being sold in a poor fashion and try to take advantage of it. Unfortunately you can't do this through IB or Schwab. You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase. To get good pricing on the sale is a different story. I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93. You have to be careful when selling any muni bond if you have never done it before. Which broker do you use? I use IB and all I can do is to just put in a limit order and wait. IB will manually execute the trade for me. I make a market myself. I also use several regional and large brokerage firms to track non-listed inventory. The inventory you'll see at firms will generally be marked up 4-6 points above market so you need to be careful. People somehow think that paying 0.1/bond to buy a bond which is marked up 5 dollars is a good deal. You're better off buying a bond under market but paying half a point to have someone else execute it. Bloomberg has some pretty cool municipal screening functions so you can track when certain bonds trade away from the market. I watch this and try to track down who owns it. Maybe next time I execute a purchase far away from the market I'll post it so you guys can check out the inefficiency.

No way, retail has major advantages over institutional. Small $50-250k sales are often done 5-15% away from the fair market value and an institutional investor is not interested in buying something that small. Like I said you need to have relationships with the right traders at firms which are on the buy side of those trades. It takes time to develop and if that is not your wheelhouse, then yes the advantage is taken away.

Good question about pricing. Probably my favorite part of municipal bond investing with distressed issuers. It goes something like this: Customer: Hey can you sell my bond? I read bad things in Barrons. Broker 1: Sure, we got a bid back at 70. This thing can go to 10 bucks so you should take it. Customer: Okay Meanwhile across another muni trading desk.... Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday. If anyone is offering thse bonds, pull down your bids to the low 70's. We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm). The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling. This is where you get good pricing. You follow bonds you know are being sold in a poor fashion and try to take advantage of it. Unfortunately you can't do this through IB or Schwab. You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase. To get good pricing on the sale is a different story. I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93. You have to be careful when selling any muni bond if you have never done it before.

Averaged 76 dollars with AGM behind it. They're trading at 95 right now. Insured bonds trade all over the place. They insure par value and interest payments but the market doesn't always value it. In fact when I purchased them, credit default swaps on the insurer were trading at half the yield of the bonds they insured. Pretty inefficient.

By the way, you may know this, but BHAC != Berkshire. BHAC could go under (I'm not saying it will or is even remotely likely, and I have bought BHAC issues before)... Berkshire won't. Good point, sorry if I made it sound equivalent. Here are the CUSIP's on different BHAC PR issues. Only a few trade such as the zero coupon COFINA and the 2024 PREPA I mentioned. 74529JEZ PR 07/31/2007 08/01/2041 PR S/TAX-CABS-A-BHAC 74529JFA PR 07/31/2007 08/01/2047 PR S/TAX-CABS-A-BHAC 74529JFB PR 07/31/2007 08/01/2054 PR S/TAX-CABS-BHAC-CR 745220LH PR 5.500 06/16/2005 07/01/2020 PR INFRA-A-BHAC-CR 745220LD PR 5.500 06/16/2005 07/01/2019 PR INFRA-REF-C-BHAC 745220LE PR 5.500 06/16/2005 07/01/2020 PR INFRA-REF-C-BHAC 745220LJ PR 5.500 06/16/2005 07/01/2022 PR INFRA-A-BHAC-CR 745220LF PR 5.500 06/16/2005 07/01/2021 PR INFRA-REF-C-BHAC 745220LG PR 5.500 06/16/2005 07/01/2022 PR INFRA-RF-C-BHAC-CR 745190W6 PR 5.250 10/04/2005 07/01/2021 PR HWY REF-SER L-BHAC 74526QVT PR 5.000 05/03/2007 07/01/2023 PR ELEC-SER UU-BHAC 74526QVU PR 5.000 05/03/2007 07/01/2024 PR ELEC-SER UU BHAC 74526QVV PR 5.250 05/30/2007 07/01/2024 REF-SER V V-BHAC-CR 74529JGA PR 07/31/2007 08/01/2054 PR S/TAX CAB-A-BHAC 74526QVW PR 5.250 05/30/2007 07/01/2025 PR ELEC-REF-SER-BHAC

I have about a 23 percent return since November from price appreciation on the insured PR bonds plus the yield which was 6.8% cash yield. I manage bonds for other investors so 4.5 tax free on Berkshire paper is good when Treasury rates are 2.5. I think 26 percent returns in PR are possible if things get worse, which they probably will. But that's not likely to happen from the current pricing unless you catch an illiquid bid.

Thank you for the comment and the news about the new 2.2 bn loan. My understanding is that PRHTA currently have 4 bn bonds plus 2 bn GDB loan. To ensure repayment of these loans, in 2013, they moved more revenues including petroleum tax increase to PRHTA so GDB loans could be repaid. Now that they want to take away the increase in petroleum tax increase and use it to back the issuance of 2.2bn bond by PRIFA, it isn't actually as bad as I initially understood. The reason is that now PRHTA only has the 4 bn bonds in debt, not the 2 bn GDB loan anymore. So even though the petroeum tax increase revenue is taken away, there is also less debt to service. So instead of 250 mn revenue increase, it will only be 90 mn. Last year, PRHTA pays 400mn interest expense. Now with this new proposal, it will only pay about 280 mn interest expense. Therefore it is still sustainable. My thesis lies in two parts. First is the GDB part, which has been weakened. The second part is that PRHTA itself is sustainable and the willingness to pay remains strong, which has not be undermined. During last week's PR conference call, It was disclosed that Governor Garcia Padilla had asked the PRHTA for a plan for reforming its operations “without using the Recovery Act,” Read more: http://www.btigresearch.com/2014/07/18/assured-guaranty-ago-mbia-mbi-ambac-financial-group-ambc-takeaways-from-puerto-ricos-fiscal-and-economic-update-webcast/#ixzz38R3oV5PP Essentially, I believe the second part of my thesis is more important than the first part. It is the financial situation of itself that decides whether it could be saved or not. Look at Greece bonds for example, they only haircut the private sector and protected ECB from getting any cut. I have already considered a similar situation here. BTW, this thesis got rejected as the application to VIC. :( muscleman, I think you have the right idea looking at PR bonds but maybe should dig deeper. There are some interesting aspects to the debt there. Sorry to hear about the VIC rejection :/ Here are a few examples I ran across: Berkshire Hathaway insures several PR issuers. There are 10-year PREPA bonds trading at 4.25% yields with BHAC behind it. Unless you think Berkshire is toast in 10 years, thats a solid risk adjusted yield. Lower parts of Assured Guaranty capital structure such as preferred are yielding less than PR bonds they insure. That is crazy. You can get 7% tax-free in AA PR GO bonds with AGO behind it versus 6.5% in taxable BBB preferred with 70 or 80 year duration. Keep looking around, you'll be surprised what you find...

I think the 8% bonds look more attractive from a margin of safety and tax standpoint. First, the bonds were issued under NY law versus the other GO bonds which will have to be restructured in court as a sovereign entity. The bonds were structured this way to make it unlikely to default on the NY bonds at the same time as the other GO bonds. This happened with Greece when the non-Athens related debt kept paying. The second is, the yield is only tax-free on the original issue yield. So it was issued at 93% to yield 8%+ which is the true tax-free yield. Not bad. The high coupon rate will also reduce some interest rate risk. Although I'm not worried about rates moving up in general it's extra protection which seems free right now. The deeply discounted GO bonds will be taxable above those OID or yield levels at issue. So if it was issued at 5% but yields 9%, you have 4% of taxable yield and 5% tax-free with some de minimus rules which is negligible. If the 8% coupon trades at 80, you have NY law a massive tax-free yield which will be equivalent to maybe 13-14% on the other GO paper but minimal haircut risk. And it seems more likely that PR will haircut the other corporations as you said to save face on the NY law GO bonds and such.

http://www.bloomberg.com/news/2014-07-24/puerto-rico-borrowing-measure-would-repay-2-billion-owed-to-gdb.html Since no one else seems interested in this situation, I'll bite. I've had a fair amount of success with some of the municipal insurers as well as Puerto Rico bonds. It seems likely to me that the credit quality for agency bonds in Puerto Rico will be continually siphoned to increase the quality of the commonwealth general obligation bonds. The lawsuit yesterday by Blue Mountain seems to think they will not get away with this, but I'm not sure about that. Investing in these agency bonds will be tough to analyze because it is difficult to understand the margin of safety. In addition the repayment of the GDP will probably put a kink in a large part of your thesis. I am interested in the 2035 8% PR GO that was issued this year. CUSIP 74514LE86. Since these were issued under NY law and have such a high coupon, the de minims tax on a drop in value to say 80 will mean a 9.5% tax-free yield. Because of the actions towards the other agencies, I suspect they will do what it takes to protect those bonds or some minimal haircut (such as 20-30%). A price of 70-80 on those will be attractive but they trade for about 90 versus the 93 issue price.