kiwing100

http://www.charlierose.com/view/interview/11919

"In an arbitrage situation, they might buy $100m of GM bonds that pay a spread of 200bps and sell CDS credit protection on $100m that generates an income of 220bps - thereby keeping 20bps/year." Hi dwy000, Great posts, and thank you for your insight. I am trying to understand the comment above, and have a question about the comment you made earlier. 1. Trying to understand the cashflows from above which results in net 20bps. On the bank's long bond position, they receive 200bps, and on the bank's short CDS position, don't they receive 220bps? Isn't this a net receipt of 420bps to the bank, rather 20bps? 2. Is the above arbitrage trade a riskless trade? I see risk if the GM bonds default - the long bond position will lose its value of $100mn and the short CDS credit protection position could potentially lose another $100mn as they have to pay out to the CDS credit protection buyer. So that would mean that the bank would have net exposure of $200mn? Not sure if my understanding is correct of the arbitrage trade as you outline above ... Thank you for your help advance in understanding the arbitrage trade.

FYI, transcript of WEB on CNBC Squawk Box post BRK AGM http://www.cnbc.com/id/42859828

To those of you on the board who did not attend the meeting in Omaha. Not a transcript but a summary as reported in local press. http://www.omaha.com/article/20110501/MONEY/705019867#q-amp-a-with-buffett-and-munger

How much is too cheap? Despite all the current headlines surrounding GS, it is interesting that BRK has probably made pre-tax profits of US$3bn on the US$5bn investment in cumulative preferred stock of GS with the attached warrants. This is a pre-tax gain of 60% in about 19-20 months since the investment was made or CAGR of about 35% p.a from the time the investment was made. The absolute dollar level of profits will likely be higher by the time 2013 rolls around (but the return in terms of percentage per annum will be lower) and also highly dependent on the share price of GS at expiry of the warrants. At the very least BRK will earn a 10% p.a return if the warrants expire worthless and that GS remains a good credit risk. The cashflows of the investment so far is estimated to be US$8bn and is attributed as follows: 1. Pref dividend received in 2009 is US$500mn 2. Redemption value of cumulative pref is US$5,500mn 3. Value of warrants on 43.478mn shares at strike of 115 is US$2,043 mn (this conservatively values the warrants at 47.00 each based on the GS Jan 2012 LEAPS with the same strike price - given that BRK's warrants have a longer maturity in October 2013, they are likely to have a higher price using Black Scholes) Is a 35% p.a return, (or US$3bn profit) too cheap? There is one other point to highlight - BRK was given an opportunity to invest in a very attractive security in GS. I highlight a comment that was made in the 1989 Chairman's letter when BRK made investments in convertible preferred stocks of USAir, Gillette and Champion International which all had coupons of 8.75-9.25%. The comment also made reference to BRK's earlier investment in the convertible preferred stock of Salomon. "Our lack of strong conviction about these businesses, however, means that we must structure our investments in them differently from what we do when we invest in a business appearing to have splendid economic characteristics."

thank you

Thank you for the link. Very useful.

Thank you for your posting

Hi there, Looking at convertible instruments and just wondering if anyone here has bought and exercised convertible instruments (i.e convertible preferred, convertible bonds) in the US. Would like to hear about your experiences. There are a few specific questions: If you convert the bond or preferred - do you get registered or unregistered shares? (i.e is the stock you get tradeable on the exchange or do you need to get the company to register the stock before you can trade the stock)? This assumes that the CB is not Reg144A or has some other restriction which limits the security beyond individual investors. I see that in some cases, the company can choose to pay cash or settle in shares upon conversion. What happens normally? I am looking to see if convertible instruments are a better way to buy the stock, so would obviously want stock on conversion rather than cash. Also do you know how long it takes when you convert the bond to get the shares? (I would like to get the dividend entitlement if possible so would like to know how long this would take) Can individual investors do this or do you need to be a big institutional investor to be able to convert bonds and get the underlying shares? I would be buying less than 10 bonds (par value approx US$10,000). Thank you in advance for your help.

I read the article - it seems that retail investors are writing options - both puts and calls. My sense is that retail investors are looking for income especially in light of low interest rates on their cash deposits. I would not be surprised if their brokers are recommending this strategy to them. It is interesting to see that retail investors go hunting for income yield when cash deposit rates are low - I have seen it happen several times - these investors forget about the downside risk on their capital when all they focus on is the income yield - especially when the income yield strategy has worked well recently. It will most likely end up horribly as they seem to be writing naked call options.

Unemployment is also a key variable - if a household loses their key source of income and do not have sufficient savings or other form of income (e.g dividends from portfolio) to help cover costs in the interim period, default on a mortgage is an increasing possibility.

A simple suggestion. Calculate your expected return for each of the investments under consideration. You should be buying those which have the highest expected return. Perhaps buy a basket of the top 5-10 names to give you some diversification (especially if there are some financials in that list)