The Corporate Bond Wars: Diversification

Larry Denham believes that when it comes to Diversification, Bond Funds win hands down.

Bond Funds: Because the underlying portfolio of most bond funds includes many different types of bonds of various maturities, investing in a bond fund conveniently provides the investor with immediate and widespread diversification. With numerous different bonds represented in the fund, the investor’s exposure to the default /credit risk of any one issuer is minimized.

Individual Bonds: In Larry’s opinion, in order to achieve adequate diversification with the purchase of individual bonds, investors need about $100,000 or more invested in bonds of approximately 15 different issuers. The impact of a default will be greater within a portfolio of individual bonds than with a bond fund, because of the numerous and diverse holdings within a bond fund. When buying individual bonds, default /credit risk in most cases is addressed by limiting investment to essential purpose, high quality investment grade (preferably “A” or better) bonds.

In my opinion, I prefer the “B” or better rated bonds and sacrifice some safety in diversity. I believe that the expectable losses in issues going into bankruptcy over time will still give better returns than bond funds.

An Introduction: The Corporate Bond Wars

Larry Denham, senior vice president and business development officer for Zions Bank wrote a good article called, “Bond Funds vs. Individual Bonds.”, published May 25, 2011. In that article, he made the argument that buying individual bonds is better than buying bond funds. Larry said, “That being said, with the availability of online investing, and after evaluating their circumstances and investment objectives, investors are learning how easy it is to take advantage of some of the benefits of buying individual bonds. Hence, without much publicity, it appears to this author that the argument has quietly shifted in favor of investing in individual bonds.”

It has been my experience from 1980 until now that the brokerage firms have been directing investors toward bond funds. Anyone insisted in investing their money in individual bonds was shown bonds with no or low yields or CCC rated junk bonds. In my case, my broker would not show me any bonds higher than CCC saying that they were not available or that he was not allowed to show them to me. If I was not a bond investor in the 1970s, I may have fallen for that line. Fortunately, around 2004, online brokerage firms with massive bond inventories became available to individual small investors. It was not long after that when I stop walking into full brokerage firm door. I probably will never walk in again.

In order to understand why individual bonds is better than bond funds, it is important to first understand both sides of the bond funds versus individual bonds argument. Most financial authors writing on the subject have focused on the following investment traits: (1) Diversification ; (2) Reinvestment of income; (3) Investment Control; (4) Cost; (5) Interest rate risk; (6) Liquidity; (7) Portfolio size.

In the next future blogs we will explorer these individual traits.

Easy Money for Young IRA Investors

If I had 21 years to go to retirement, I would invest in Pulte Group, Inc. 7.875% of 06/15/2032 bonds. It is a Moody’s B1 and a Standard and Poor’s BB- rated bond. As of May 12, 2011, the bond sold for $937.50 with a Yield to Maturity of 8.517%.

This means if you bought the bond on June 15, 2011 and held it to maturity, you would get $78.75 per year for 21 years or $1,653.75. Plus the investor gets $62.50 in appreciation. For an investment of $937.50 over 21 years, you get $1,716.25 or a total of 183.07%. Since this is in your IRA, your taxes are deferred until retirement. So you can reinvest all the money into other bonds giving high yields. All the company has to do is stay out of bankruptcy and the investor gets their money.

PulteGroup, Inc. (NYSE: PHM) based in Bloomfield Hills, Mich., is America's premier home building company with operations in 60 markets and 28 states. According to Pulte Group Inc., the Company has an unmatched capacity to meet the needs of all buyer segments through its brand portfolio that includes Pulte Homes, Centex Homes and Del Webb. If you are an investor and need additional assistance, please use the internet; contact your broker or Pulte Group’s Investor Relations / Media Relations team.

http://phx.corporate-ir.net/phoenix.zhtml?c=147717&p=irol-contact
You can look up the Public Relations contacts by using the above link.

Investing in the Venezuela Republic

In my IRA, I hold a large position in Venezuelan Republic bonds. Venezuela is an OPEC oil producing country in Northern South America. It is run by a dictator that United States does not like. So the nation’s bonds are given speculative grade (High Yield or “Junk”) by Moody’s and “Standard and Poor’s (S&P).” I buy these bonds that have earlier maturity dates because I am an old man. I want to live to use the money. But for people in their 30s or early 40s, they should look at this bond for IRA purchases.

Venezuela Republic 9.375% of January 13, 2034

It is rated by Moody’s at B2 and S&P at BB-. Ratings have increased in the past 10 years. It pays twice a year, January 13 and July 13 until January 13, 2034. As of this writing, the bond is not on “Credit Watch.” The recent price of the bond is $702.50, yielding 13.642%.

http://deutscheboerse.sh02.de/EN/index.aspx?pageID=108&ISIN=US922646BL74
Look at the bond on the Börse Frankfurt Exchange

That means that if the bond was purchased on July 13, 2011 and kept to maturity, this is what you, the investor would get. On January 13, 2034, you get $1,000 ($1,000 minus $702.50) is an appreciation profit of $297.50. Over the next 22.5 years, you would get $93.75 per year or $2,109.38. In total, the investor makes $2,811.88 per $702.50 bond investment. The investor makes 4 times their money in 22.5 years.

http://data.cbonds.info/emissions/1645/Prospectus_Venezuela_2034.pdf

Prospectus Supplement to Prospectus Dated January 7, 2004

Taking the Debt Collector to Court

I had some things happen in my life that to this day, gets me upset when I think about them. Not to long ago I got a call from a debt collector that claimed because my name is Darnell Williams and I live in Harrisburg, I owed this large debt. I told the man that he had the wrong person. He called me a liar. Then I proceeded to tell the man off. At the end I told him if I am such a liar, sue me in court over the money and we will see who is lying and who is going to be sorry. He admitted that he had the wrong Darnell Williams and hung up. He was trying to get me to pay a debt that did not belong to me.


About 12 year ago, I got a notice for court action against me for non-payment of a dental bill for my youngest daughter. In Pennsylvania, a bill collector can take you to court to collect on a debt that is the debt belonging to your child, even if the mother of that child is the owner of that debt. This is the law that they thought they were going to take me to court on. They knew I had the deepest pockets.

However, knowing the law, I knew that my insurance paid 50% of the $2,000 bill. I personally paid 25% or $500 of the bill. My x-wife should have paid the last 25% of the bill. Not only did I pay my obligation under the law of 50% payment (the insurance $1,000 Plus $500 out of pocket), the bill was over 7 years past due. That means that in the Commonwealth of Pennsylvania, neither my x-wife because of the bill being past due nor I was obligated to pay because of meeting my obligation.

Yes, I was totally upset again and sent the debt collector who is a practicing attorney in the area a registered letter stating the facts behind the bill and told the attorney bluntly that if I show up in court with this information, I will counter sue them for violating the Fair Debt Collection Practices Act (FDCPA). Two days later, I got a letter from the attorney with a copy to the court dismissing the action against me. They never bothered me again.

Most people do not have 15 college credits in Business law or a child who has a BS in Criminal Justice as I do so you may want to see an attorney.

In your case, you may have forgotten about a debt because it is so old. It might be yours. So my first suggestion is to ask the collector to provide you with verification of the debt. If you request verification, the law says they must prove that the debt is yours and stop collection actions until they do so. Be sure you keep records of the request you sent to the collector for debt verification.

Once you receive the information from the collector, compare it with what is appearing on your credit reports. If they provide proof that the debt is yours and you have the money, by far the easiest thing to do is just pay what you owe and move on with your life.

But sometimes these debt collectors threaten to take your car, house, or put you in jail. Sometime, the debt is uncollectible because it is over 7 years old. Sometimes the debt belongs to your dead spouse. Never pay someone else’s debt especially with your personal check, no matter what the circumstances are. This could lead to big trouble for you down the road.

If you don't owe the money, or even if you do, I suggest you speak to a really aggressive attorney who would be willing to take your case on a contingency basis. The contingency fee would be based on suing the collector for using threats, like saying they will take your property, that appear to be in violation of the Fair Debt Collection Practices Act, or FDCPA. The FDCPA states a collector may not say they will take an action unless they are actually planning to do so. The collector may not legally seize any of your property to satisfy your debt unless the property is collateral for what you owe. There have been some big awards for violations of the FDCPA.

Either way, if this case goes to court, so should you. If you don't appear before the judge, the collector will get a judgment for the debt that can be used to garnish your wages in some states. The statute of limitations for suing in court to collect a debt looks to be six years in the state of Maine. There is a federal statute and a state statute on this. Typically the clock starts after the debt charges off. The definition of charge-off varies by state, but is generally 120 to 180 days from the date of your last payment.

Should the debt be uncollectible in court due to the statute of limitations, you can add yet another violation of the FDCPA to the list your attorney will be suing for. Bringing an action on a debt that is past the statute of limitations is not legal. If you go to court on your own, simply appear in court and submit documentation showing the statute of limitations has expired and the court should find in your favor. If, however, the debt is collectible in court, I recommend you determine how you will pay what you owe. Working out a repayment plan with the collector before your court date is even better.

Make Your Plan Then Work Your Plan!

I can’t stand it when people with great paying jobs have nothing to show for it then complain about others that have a pot to do you know what in. Equally as bad is watching people who don’t have good jobs but will drop a penny, nickel, or dime but will not pick it up. These people are what I call the “Stupid Poor.” In the book of Michael Jackson they are called, “Ignorant!”

You want to send your children to college? Well the time to start planning for it is the day they are born, not when they turn 14 years old. My oldest daughter and I bust out laughing at the idiots that we seen looking for help in sending their children to college only one year away from High School Graduation. The time to start saving for that new car is when your old car is still new. But if you want to keep up with your friends and have the bank and your employer own you, stop reading this Blog and go look at “Two Men And a Baby” or whatever the name of the show is on TV. I can’t help you. I am only concerned with people who want to be the head of their domain.

Let me give you some tools that can come in handy if you want to plan for that new expensive car or home.

You need a “Whirlpool Duet WFW94HEX 27" Front-Load Washer with 5.0 cu. ft. Capacity.” It sells for $935. If the Stupid Poor pays for it over 60 months at 20% interest, the Stupid Poor would only have to pay $25 per month, for a total of $1,500.

If they pay $46.75 per month, they can pay it off in 24 months, paying only $1,122. That is $378 less over 2 years.

http://www.mindyourfinances.com/calculators/savings-goals

If they can wait, by using the Savings-goal calculator, the same people can figure out how much they would have to save and at what rate to get the same thing. Saving $25 per month, they may be able to reach their savings goal of $935 in 3 years. They will also be able to avoid paying up to $550 more to wash their clothes.

The idea is to create a savings plan that will allow people to make their paycheck go further. You want to avoid wasting your money.

http://www.printablebudget.com/householdbudget.php

The link above will show you how to set up a Bill Paying Schedule for your household. Warning, this is no good if you do not have the discipline to follow it!

You can find other Savings Calculations by viewing this link by the Pa. SEC.
http://www.psc.state.pa.us/investor/calculators.html

GMAC -- Taking a Ten Year Risk

GMAC Inc. bond issue, General Motors Acceptance Corporation 7s of Sept. 15, 2021 sells for $955 as of April 19, 2011. That is a yield of 7.8% for about 10 years, 5 months. In this amount of time, the investor would get $45 bond appreciation plus $70 per year for 10 years plus $35 for 6 months. That is a total of $780 per bond.

For this amount of money, you, the investor will be taking some risk. The first risk is inflation risk. What is the risk that inflation will run above 8% in the next 10 years? If inflation runs above 8%, you will loose to inflation. Bankruptcy risk is a real factor since the bond S&P rating is only “B”. That is below investment grade but above the critical S&P “CCC” rating. As long as the company can pay, you, the investor will get your money.

According to Wikipedia, Ally Financial Inc., previously known as GMAC Inc., is a bank holding company headquartered in Detroit, Michigan, United States at Tower 200 of the Renaissance Center. With more than 15 million customers worldwide, Ally Financial provides a range of financial services including auto financing, insurance, mortgage services, and online banking.

In 2009, Ally employed 18,900 people. In 2008, the firm provided financing to 75 percent of the 6,450 GM dealers. On 24 December 2008, the Federal Reserve accepted then-GMAC's application to become a bank holding company. Ally returned to profitability in 2010, posting a net profit of $1.075 billion for the fiscal year. Ally plans an initial public stock offering in 2011.
As of 30 December 2009, approximately 14.9% of GMAC was owned by Cerberus Capital Management, 12.2 % by third party investors, 56.3% by the United States Treasury, 16.6% by General Motors (with 9.9% of that in a GM Trust).

The company's Global Automotive Services offer retail auto financing and leasing; dealer lines of credit for vehicle inventory, equipment or facilities; insurance coverages including retail vehicle service contracts and commercial insurance; and remarketing services through physical auctions and online services. Ally Financial also operates Ally Servicing (previously Semperian) within its Global Automotive Services division. Ally Servicing provides customer relationship management, servicing, and collection through several inbound call centers across the U.S.

Ally Financial's mortgage operations include Residential Capital, LLC (ResCap) and the mortgage activities of Ally Bank and ResMor Trust. Through these divisions, the company focuses primarily on the residential real estate market in the U.S. Business activities include the origination, purchase, servicing, sale and securitization of residential mortgage loans.

GMAC Home Services is the parent for GMAC Real Estate, formed by the purchase of Better Homes and Gardens Real Estate in 1998, and GHS Mortgage. Brookfield Residential Property Services purchased the GMAC Home Services business in September 2008. Brookfield is a wholly owned subsidiary of Brookfield Asset Management, a global asset manager located in Toronto, Canada.

Ally Financial's direct bank in the U.S., Ally Bank, offers savings products, including certificates of deposit (CDs), online savings accounts, interest checking accounts and money market accounts. ResMor Trust Company offers Ally-branded deposit products in Canada, including online savings, guaranteed investment certificates (GIC) and tax free products. Ally Bank and ResMor Trust Company are members of the FDIC and CDIC respectively.

However, the bonds talked about in this blog are not covered by FDIC or CDIC. Darnell L Williams does not own this issue but owns an issue that matures in 2018.