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Tim Ayles
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We strive to build highly disciplined, sensible client portfolios. Portfolios that are focused on investing in businesses with solid free cash flows and solid dividend payouts. We buy businesses, not stocks. Tim is a Registered Investment Advisor.
My company:
Napa Wealth Management, Incorporated
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  • Playing the long bond with POMO in our face
    With the government buying bonds on a POMO day tomorrow, expect the long bond to hold its bid today. Maybe buy TBT on the close for a day trade tomorrow as Primary Dealers are likely to sell to the Fed tomorrow.

    As posted earlier - use the upcoming dip to buy though.

    This is a trade, not a fundamental change of position.


    Disclosure: Long TLT, BND, and other bond ETF's
    Aug 18 10:09 AM | Link | Comment!
  • Paring back exposure to the long bond....... for a trade only
    After today's surge in the long bond, with sentiment near record bullishness in the short term, it is time to pare back long exposure for a trade and to look for areas at lower prices to add long exposure back again.

    We plan to buy the next dip that we are certain is coming soon.


    Disclosure: Long BND, TLT, BDF, and other bond funds and etf's in client accounts
    Tags: BND, TLT
    Aug 16 6:22 PM | Link | Comment!
  • Variable Rate Investments
    With stocks seeming to get ever more volatile as the days wear on, investors are flocking out of mutual funds in droves. As they sell, they are faced with the ever dire situation of trying to figure out if they should hold cash, or reinvest that money into something else. At the moment - that is a hard decision. When the market continued to rise with every other asset class, while the dollar fell in value, it made sense to just buy anything. Now with the value of the US $ climbing, one might be tempted to just sit in cash for a little while.

    The problem with cash, as most market guru's claim, is that it doesn't pay anything at the moment. To hold cash means to earn near 0% interest. It's a bet on the direction of the dollar is all, and with dollar bulls now registering over 90%, the up trend in the greenback might be due for a pause.

    It seems investors instead are using their cash from stocks they are selling and rushing into bonds based on the hundreds of billions of inflows into such funds in the past year. These investors will have to hope and pray that rates will continue to stay steady or drop (althoug I can make a case for lower rates, most think that idea is crazy.)

    Since I do not know the direction of interest rates, I propose finding investments that provide and income like a bond would, but that could increase in value if rates rise. I will give a list of my favorites in this article. They are not plentiful, but these investments are out there. They are, in a nutshell, publicly traded SWAPS. These investments hold a specific fixed income debt security in a trust, per se, and pay out a variable rate. The creator of the trust (usually a large bank) is willing to take fixed income risk, while paying out a variable rate. The creator of the trust will make a lot of money if interest rates fall, and lose money if they rise. Don't lose sleep being sad for them though. They have ways to hedge off their own risk in the event that rates rise. You as an investor though, usually don't. Thus the reason these investments should have a place in fixed income portion of your portfolio.

    The first one I would recommend and investor look at traded on the NYSE under the Symbol: GJO This is a VERY illiquid investment (as most of these are) in which only $25 million was issued. This is a trust created by Wachovia Corporation to buy Wal-Mart bonds that are due Feb 15, 2030 and have a 7.55% coupon rate. The underlying bond that this trust holds is currently trading at a price of $130 (par is $100) giving a yield to maturity of about 5%. If you wanted to buy the bonds themselves, and rates began rising, your principal would drop dramatically as rates rose. With GJO though, your principal can rise! At the time of this writing, GJO is trading at $17.79. Par value of GJO at maturity is $25 per share. This means that you will earn 40.52% at maturity if you were to buy today just on principal appreciation alone. With the maturity date around 20 years away, this equates to just under a 2% annualized return alone. But this is not all. Wachovia has aggreed to pay you three month LIBOR plus .50% based on the $25 par price up to a total of 7.5%. As you can see, this was probably not the best investment to buy when rates were higher. But with LIBOR at a point where it can't go much lower (it is near 0%) one has to imagine they are getting in near the lows. With the discount to par, the current yield on GJO stands at around 1.12% - about 400% better than the bank! As long as Wachovia stays around (not hard to imagine since they are owned by Citigroup, who in turn is seemingly not allowed to fail) and as long as Wal-Mart continues to pay interest on their bonds, an investor should expect to continue to be paid. I for one would rather own GJO at 1% with the potential of 40% gains and an income that can rise along with interest rates.

    The second is a bit different in that this investment has a floor on the rate that it pays. The symbol is: PYT With a par value also at $25 and a maturity date of 2/15/2034, this investment hold the Goldman Sachs 6.345 coupon bond. The variable rate paid by the creator of the trust - Merrill Lynch, is 3 month LIBOR plus .85% There is a catch though. The lowest rate you will receive is 3.00% or LIBOR plus .85%. Because LIBOR is near 0%, the 3% floor is currently in effect. Remember though that this 3% is paid based on a $25 par value, and with PYT currently trading at $16.66 at the time of this writing, the true yield to buyers today is over 4.5%. With potential principal gains at maturity of 50%, the current yield to maturity is near 6.5%! The cap on the interest rate paid is 8% on this investment. With the current yield to maturity on the bonds that make up this investment sitting at 7.75%, an investor is not giving up much yield for some protection in the event of rising interest rates. I would much rather own PYT instead of the underlying GS bonds at current prices.

    One thing to keep in mind is that both of these issues are very tiny. If you are looking to add variable rate investments in your portfolio, make sure you buy these wisely. Do not use market orders, and be patient to get your price. In any event, buying variable rate protection if you are worried about higher interest rates makes a heck of a lot more sense than buying fixed rate bonds or leaving money in cash.



    Disclosure: Long GJO, PYT

    Disclosure: Long GJO, PYT for personal and or client accounts
    May 18 12:12 PM | Link | 1 Comment
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