{"id":21877,"date":"2011-06-23T03:04:13","date_gmt":"2011-06-23T07:04:13","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=21877"},"modified":"2011-06-23T03:04:13","modified_gmt":"2011-06-23T07:04:13","slug":"this-advice-might-save-you-thousands","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/06\/23\/this-advice-might-save-you-thousands\/","title":{"rendered":"This Advice Might Save You Thousands"},"content":{"rendered":"

By Carla Pasternak, DividendOpportunities.com<\/span><\/strong><\/a><\/p>\n

Companies are sitting on record amounts of \t\t\t\t\tcash. Default rates on corporate bonds — even for companies \t\t\t\t\twith questionable credit that pay high yields — are \t\t\t\t\tplummeting.<\/span><\/p>\n

So why did I just tell my High-Yield Investing<\/a><\/em><\/strong> subscribers to watch out?<\/p>\n

There’s a danger lurking in the market. A danger that only \t\t\t\t\tcomes up when there’s a perfect mix of low interest rates, \t\t\t\t\tcash-rich companies, and yield-starved investors.<\/p>\n

<\/span><\/p>\n\n\n\n
<\/ins><\/ins><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/span><\/p>\n

Let me explain…<\/span><\/p>\n

Back in February 2009, I bought US Cellular 7.5% Senior \t\t\t\t\tNotes. At the time — the height of the downturn — they \t\t\t\t\ttraded at just over $17 each, despite having a par value of \t\t\t\t\t$25. (Par value is the face value of the note, at which \t\t\t\t\tcompanies can buy them back from investors.)<\/p>\n

While the market was scared, there was an opportunity. In \t\t\t\t\tthe roughly two years I held the bonds, they paid $4.72 each \t\t\t\t\tand the price soared back above the $25 value.<\/p>\n

High-Yield Investing<\/a><\/em><\/strong> subscribers who bought and \t\t\t\t\tsold with me ended up making more than 68%… on a bond<\/em>… \t\t\t\t\tin a little over two years.<\/p>\n

So what’s the problem?<\/p>\n

Just a few weeks ago, these notes were called. Not only did \t\t\t\t\twe lose our solid income stream, but the notes were trading \t\t\t\t\tslightly above their par value. That means when they were \t\t\t\t\tcalled at $25, investors who bought above that mark were hit \t\t\t\t\twith a capital loss.<\/p>\n

I’m seeing this happen more and more. Income investors are \t\t\t\t\tstarved for safe income and have piled into bonds, pushing \t\t\t\t\tprices up.<\/p>\n

At the same time, companies are sitting on massive cash \t\t\t\t\tdeposits and seeing record-low interest rates. They are \t\t\t\t\ttaking the opportunity to buy back outstanding debt and \t\t\t\t\trefinance at lower rates.<\/p>\n

This all means investors buying bonds and other callable \t\t\t\t\tsecurities over their par value need to be careful. It’s \t\t\t\t\tgetting more common for these securities to be called back, \t\t\t\t\tleading to a possible loss if you paid more than par.<\/p>\n

But that’s not the entire story.<\/p>\n

A little known amendment sponsored by Senator Susan Collins \t\t\t\t\tto the Dodd-Frank financial reform bill affects one popular \t\t\t\t\ttype of preferred stock banks issue, called trust \t\t\t\t\tpreferreds.<\/p>\n

The Collins amendment says banks with more than $15 billion \t\t\t\t\tin assets soon won’t be able to use trust preferreds to \t\t\t\t\tcontribute to their Tier 1. (Tier 1 capital is the cash \t\t\t\t\treserves a bank must keep to safeguard against problem \t\t\t\t\tloans.)<\/p>\n

Banks aren’t required to redeem their trust preferreds. \t\t\t\t\tHowever, they may wish to because the securities will no \t\t\t\t\tlonger count as Tier 1 capital and also because they can \t\t\t\t\tissue new debt at much lower rates today.<\/p>\n

And they don’t have to wait until the stated call date. \t\t\t\t\tInstead, the banks can claim a legislative change provision \t\t\t\t\thas been triggered in their prospectus, allowing the trust \t\t\t\t\tpreferreds to be called anytime.<\/p>\n

Bottom line: If you hold — or are looking to buy — any \t\t\t\t\tsecurity that can be called and is trading above par value, \t\t\t\t\tmake sure the income it pays is worth the risk of owning right now, even if \t\t\t\t\tthe shares were called back tomorrow. <\/span><\/p>\n

Good Investing!<\/p>\n

<\/span><\/p>\n

\"\"
\nCarla Pasternak’s Dividend Opportunities<\/em><\/span><\/p>\n

<\/em>P.S.<\/strong> — For more income advice, be sure to view the webcast<\/a><\/strong><\/span> my colleague Dan Moser recently put \t\t\t\t\ttogether about some of the market’s highest-yielding stocks. \t\t\t\t\tHe calls it “Why Buy a Stock Yielding 2% When You Can Buy \t\t\t\t\tOne Paying 26%?” Click here to watch<\/a><\/strong>.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Companies are sitting on record amounts of cash. Default rates on corporate bonds — even for companies with questionable credit that pay high yields — are plummeting.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-21877","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21877","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=21877"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21877\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=21877"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=21877"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=21877"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}