Most Intriguing Investment Idea of the Day Thread

[ChpBstrd]

Asset: Federal Home Loan Banks bond maturing 10/26/2038, CUSIP: 3130AXGD4
Price: $1,000, yield to worst 7%
Rationale:
Triple-A rated bonds are now available with yields of 7%. We've crossed that milestone. Yes, it's continuously callable starting in January, but this seems like an attractive place to store 2nd tier emergency funds, a house down payment fund, part of one's bond allocation, or a college savings fund with a few years to go.

I'm heavily invested in SGOV to chase a 5.3% yield with AAA assets, but it's fair to ask why I'm at the short end of the curve when the long end pays 7%? The risks are:

a) Rates continue rising, defying everyone's expectations, and these bonds lose value.
b) Rates quickly fall, and your bonds are called away, leaving you regretting chasing a couple percent in yield with callable agencies priced at par instead of using deeply discounted treasuries.

So in the long term, it's kind of a heads I win, tails you lose situation. In the short term, the fact remains you can pull 7% at extremely low risk. So I would advise this direction for any short-term money you can't afford to lose.

[Must_ache]

I picked up $10K of this last week @ 7%, think it shows 6.7% today, and I have some more at lower yields. 

7% is pretty attractive I admit, and it is supposedly AA+ rated but that flies in the face of a yield that is a point and a half higher than the Treasury risk-free rate.

Any idea what the risks are?  There must be a catch otherwise people would buy this instead of the 20-yr.

[ChpBstrd]

I picked up $10K of this last week @ 7%, think it shows 6.7% today, and I have some more at lower yields. 

7% is pretty attractive I admit, and it is supposedly AA+ rated but that flies in the face of a yield that is a point and a half higher than the Treasury risk-free rate.

Any idea what the risks are?  There must be a catch otherwise people would buy this instead of the 20-yr.

1) "implicit" government backing versus treasuries
2) these are mortgages, and there are signs of a housing bubble about to pop under the weight of high mortgage rates
3) they are callable, so there's much less upside if rates fall and no way to lock in an income for a decade plus.

Of these, 3 is probably the biggest issue. We can measure the difference made by 1 and sometimes 2 by comparing 30y treasury yields (currently 5.03%) with the yield on non-callable agency bonds.

The highest-yielding non-callable agency bond on my screener is from the Tennessee Valley Authority (CUSIP: 880591EY4) maturing in 2052 at a 5.798% YTW and 5.42% current yield. It is AAA/AA+ and seems like a great option for people whose priority is to lock in a safe income source for the long term, while positioning for capital gains in the event rates fall. Really this particular bond deserves its own write-up in this thread, but here it is!

A portfolio that was 74% this bond and 26% stocks would have a current yield in excess of 4% and would be largely immune to a sequence-of-returns-risk event. Such an AA would be a bet that the next financial crisis will become a problem long before inflation erodes away the yield on the bond.

[Alternatepriorities]

How do you see systemic changes affecting the bond thesis? It seems like both the retirement of the boomers and the recent trend of bringing manufacturing back to North America will be inflationary in the US and that might lead to Fed to stay higher for longer that even their own estimates which the market seems to be taking as a worst case scenario. Maybe I still have some institutional trust issues after "transitory" inflation.

This is the first time bonds have actually seemed like legit investments since I started investing. I could never buy into the low rates forever theory but now I have to overcome my skepticism to take advantage of a new opportunities.

Thanks for all your posts on the subject it's been very helpful.

[ChpBstrd]

How do you see systemic changes affecting the bond thesis? It seems like both the retirement of the boomers and the recent trend of bringing manufacturing back to North America will be inflationary in the US and that might lead to Fed to stay higher for longer that even their own estimates which the market seems to be taking as a worst case scenario. Maybe I still have some institutional trust issues after "transitory" inflation.

This is the first time bonds have actually seemed like legit investments since I started investing. I could never buy into the low rates forever theory but now I have to overcome my skepticism to take advantage of a new opportunities.

Thanks for all your posts on the subject it's been very helpful.

Regarding the boomers, most are already retired. I imagine many are living off of stock-heavy portfolios since their prime portfolio building years featured low interest rates and fast appreciating stocks. It would be wise for them to pivot to bonds at this point, since they cannot afford a SORR event at this age, but what people should do and actually do are different things. Recall that boomers lived through arguably the greatest time in history to own stocks, so I doubt they lose their habits in their 70s and 80s and suddenly demand bonds. Plus, I'm not sure it would matter if they all did something in masse. The U.S. population pyramid is relatively smooth compared to other countries like China, which has distinct generational lumps. The BBs are losing relevance.

Regarding onshoring, I'll believe it when I see it. A headline from earlier this month read "China's September trade surplus with U.S. widens to record $34.13 billion" and there is no shortage of Chinese products anywhere in the U.S. I've been hearing about an imminent revival in US manufacturing since at least the 1990s. And actually US manufacturing has been doing well for the past few years, with a decades-long growth trend, even as it falls to the point of becoming a single-digit percentage of GDP. I don't see anything changing, except that manufacturing is usually capital-intensive and high rates may discourage it, raising prices for goods, and encouraging higher rates! The old wage-price spiral applied to debt financing!

The long-term systemic risk is that rising wages, transportation costs, a war, or tariffs cause China not to be the U.S's inflation crutch anymore. Already, some of the most labor-intensive manufacturing is moving to even cheaper places like Vietnam. A Chinese invasion of Taiwan could be highly inflationary because imports with no good substitutes could be reduced, but also recessionary because many US businesses' supply chains would be shattered, and it is unclear how the Fed would react to a scenario like that. Would they raise rates to fight the inflation? Or cut rates to fight the recession caused by an event unrelated to US monetary policy? Markets wouldn't know either, and the result would be some very sharp movements in asset prices while the Fed waits for data to justify a course (also see: 2021).

The "everything falls apart" scenarios are more salient and therefore mentally engaging, but then again the status quo exists and could continue existing for some very good reasons too. It keeps Chinese people employed and it keeps American taxes and interest rates low. Each side likes each thing, but dictators are always a wildcard as Mr. Putin demonstrated.

Regarding normalized interest rates, Fed officials have said they have in mind a "neutral" rate, anchored to the long-term economic growth rate and the ideal 2% inflation rate. Sub-1% rates were so uncomfortable for the Fed there was an aborted attempt to raise rates between 2015 and 2019, even though CPI was under 2%. I think we'll only go below 3% again if there is an extraordinary deflationary recession occurring, on par with the GFC, and maybe not even then due to the traumatic memory of inflation. Similarly, I think we're nearing a peak level with long term rates where something is going to break soon, stopping the upward pressure. If mortgage rates and rates on CRE loans keep rising, the market will eventually run out of new buyers and prices will have to adjust. Similarly, banks are running out of runway and margin.

IMO, the remaining soft landing scenario involves long term rates falling next year as quickly as they rose this year, in anticipation of a series of rate cuts from late 2024 through 2026. Otherwise - i.e. if the yield curve un-inverts on the long term side - lending markets will have to seize up IMO. But then again I suck at forecasting as much as anyone else!

[Alternatepriorities]

How do you see systemic changes affecting the bond thesis? It seems like both the retirement of the boomers and the recent trend of bringing manufacturing back to North America will be inflationary in the US and that might lead to Fed to stay higher for longer that even their own estimates which the market seems to be taking as a worst case scenario. Maybe I still have some institutional trust issues after "transitory" inflation.

This is the first time bonds have actually seemed like legit investments since I started investing. I could never buy into the low rates forever theory but now I have to overcome my skepticism to take advantage of a new opportunities.

Thanks for all your posts on the subject it's been very helpful.

Regarding the boomers, most are already retired. I imagine many are living off of stock-heavy portfolios since their prime portfolio building years featured low interest rates and fast appreciating stocks. It would be wise for them to pivot to bonds at this point, since they cannot afford a SORR event at this age, but what people should do and actually do are different things. Recall that boomers lived through arguably the greatest time in history to own stocks, so I doubt they lose their habits in their 70s and 80s and suddenly demand bonds. Plus, I'm not sure it would matter if they all did something in masse. The U.S. population pyramid is relatively smooth compared to other countries like China, which has distinct generational lumps. The BBs are losing relevance.

Regarding onshoring, I'll believe it when I see it. A headline from earlier this month read "China's September trade surplus with U.S. widens to record $34.13 billion" and there is no shortage of Chinese products anywhere in the U.S. I've been hearing about an imminent revival in US manufacturing since at least the 1990s. And actually US manufacturing has been doing well for the past few years, with a decades-long growth trend, even as it falls to the point of becoming a single-digit percentage of GDP. I don't see anything changing, except that manufacturing is usually capital-intensive and high rates may discourage it, raising prices for goods, and encouraging higher rates! The old wage-price spiral applied to debt financing!

The long-term systemic risk is that rising wages, transportation costs, a war, or tariffs cause China not to be the U.S's inflation crutch anymore. Already, some of the most labor-intensive manufacturing is moving to even cheaper places like Vietnam. A Chinese invasion of Taiwan could be highly inflationary because imports with no good substitutes could be reduced, but also recessionary because many US businesses' supply chains would be shattered, and it is unclear how the Fed would react to a scenario like that. Would they raise rates to fight the inflation? Or cut rates to fight the recession caused by an event unrelated to US monetary policy? Markets wouldn't know either, and the result would be some very sharp movements in asset prices while the Fed waits for data to justify a course (also see: 2021).

The "everything falls apart" scenarios are more salient and therefore mentally engaging, but then again the status quo exists and could continue existing for some very good reasons too. It keeps Chinese people employed and it keeps American taxes and interest rates low. Each side likes each thing, but dictators are always a wildcard as Mr. Putin demonstrated.

Regarding normalized interest rates, Fed officials have said they have in mind a "neutral" rate, anchored to the long-term economic growth rate and the ideal 2% inflation rate. Sub-1% rates were so uncomfortable for the Fed there was an aborted attempt to raise rates between 2015 and 2019, even though CPI was under 2%. I think we'll only go below 3% again if there is an extraordinary deflationary recession occurring, on par with the GFC, and maybe not even then due to the traumatic memory of inflation. Similarly, I think we're nearing a peak level with long term rates where something is going to break soon, stopping the upward pressure. If mortgage rates and rates on CRE loans keep rising, the market will eventually run out of new buyers and prices will have to adjust. Similarly, banks are running out of runway and margin.

IMO, the remaining soft landing scenario involves long term rates falling next year as quickly as they rose this year, in anticipation of a series of rate cuts from late 2024 through 2026. Otherwise - i.e. if the yield curve un-inverts on the long term side - lending markets will have to seize up IMO. But then again I suck at forecasting as much as anyone else!

That is an interesting point about boomers and inertia keeping them in stocks I had not really considered. If the BB are '46-'64 and their full SS age is 65, then we are just about in the middle of them retiring. I was thinking about the massive amount of money in target date funds and managed assets that presumably has followed some form of conventional stock/bond diversification guidelines. The only reason I could see for anyone to buy bonds a couple years ago when rates were below inflation was "it's my AA plan". That has clearly changed with bonds paying rates that are actually positive now net inflation assuming it doesn't spike again. I haven't had as much time to keep up with the details having baby at home... but I wonder if there isn't addition upward pressure on bond rates caused by the BB leaving the work force and not putting 40% of their 401k blindly into bonds?

My father was an early BB who got a late start having kids of his own so his oldest (me) straddles the line between very young gen X and very old millennial. He retired early but never spent down his retirement savings and passed last year at the age of 73. Conventional wisdom would have had his assets split something like 50/50 stocks and bonds plus a house that was paid for... The wealth passes to my siblings and I where the same conventional wisdom would push more of the money to stocks including the sale of the house (which someone else might finance creating an additional bond with the money flowing into our respective AA. Granted for many families the inheritance will be spent pretty quickly this seems like it would help to push bond rates higher still.

I'm pretty sure were thinking about the increased manufacturing in the US and other systematic risks the same way. They would increase interest rates and drive down he value of today's bonds, but you are not concerned enough about it to dampen your interest in bonds at the current rates? Primarily because the you expect the economic pressure of higher interest rates to pushing things back down faster than the other factors push things higher. is Is that correct?

[ChpBstrd]

Asset: Eli Lilly (A1/A+) bonds maturing 9/15/60, call protection until 3/15/60, (CUSIP: 532457BZ0)
Price: $513.44, YTM: 5.655%, current yield 4.87%

Asset: Public Service Co New Hampshire (A1/A+) bonds maturing 9/1/50, call protection until 3/1/2050, (CUSIP: 744538AD1)
Price: $510.84, YTM: 6.143%, current yield 4.7%

Asset: Astrazeneca (A2/A) bonds maturing 8/6/50, call protection until 2/6/50, (CUSIP: 046353AX6)
Price: $521.21, YTM: 5.597%, current yield 4.07%

Asset: Entergy Arkansas (A2/A) bonds maturing 6/15/51, call protection until 12/15/50, (CUSIP: 29366MAB4)
Price: $530.71, YTM: 6.232%, current yield 4.99%

Rationale for all:
Welcome to a world where you can buy A1 or A2 rated bonds from relatively safe utilities and drug companies at just over half their par value, with yields to maturity in the 5.6%-6.2% range, and current yields well over 4%! That is to say, if you are considering retiring on the 4% rule, the interest from these bonds will cover your income needs for the next few years. Then, if rates are cut, the value of your bonds will rocket upward.

I'll run the Eli Lilly bond through a bond price calculator as an example of what could happen with a 200bp interest rate reduction - my recession base case scenario.

Par: $1,000
Annual Coupon Rate 2.5%
Market Rate: change the current 5.655% YTM up or down 2%
Years to Maturity: 36.85y, then subtract 2y to simulate the future
Days Since Payout: ~45
Coupon Frequency: twice a year

Current price: $513.44
After 200bp reduction in market yield and 2 fewer years: $773.43, a +50.64% increase in price, not including accrued coupons

If we go the other direction and increase the YTM 200bp, we obtain a price of 375.71, a -26.82% loss. This is the essence of mega-convexity: 51% to gain and 27% to lose from equal moves in opposite directions! Every one of these bonds is like that, and there are many more, so it's possible to build a diversified portfolio that's poised to pop in the event long term rates fall for any reason.

In the meantime, you sit there and collect current yields in excess of 4% - enough to sustain the fixed income leg of your 4% rule retirement without selling anything. Dividend junkies dream of such opportunities, but do their portfolios have the upside of these bonds? The seniority?

Another intriguing thought: This seems like an ideal time to execute Nassim Taleb's barbell strategy: 95% ultra high convexity bonds for income plus 5% to a futures contract or LEAPS options on the S&P500 for additional upside and inflation protection.

[Alternatepriorities]

After some thinking and looking i dipped my toes into the water with some of the US treasuries mentioned earlier. As someone looking at bonds with interest for the first time... How would you go about evaluating these four bonds against each other?

[ChpBstrd]

After some thinking and looking i dipped my toes into the water with some of the US treasuries mentioned earlier. As someone looking at bonds with interest for the first time... How would you go about evaluating these four bonds against each other?

My brokerage offers Moody's reports for some of the bonds on offer, and that's a good first place to start. See how the experts evaluate companies.

One easy first question is: Would you consider buying the stock? If not, you might not like the bond. Under no circumstances would I buy a bond from a company in long-term decline, or with a potentially obsolete product. YMMV, but to me this means the plethora of office operators and old fashioned telecoms with bonds on the market. Others think of fossil fuels or tobacco, but I disagree about their obsolescence. YMMV. I also see a lot of Alibaba bonds but I'm wary of them due to the sorts of scenarios that just whacked investors in Russia. Then I personally like to look at things like Return on Assets, Leverage, and Dividend Yield to sort out the companies which are winding themselves down due to an inability to earn their cost of capital. You see lots of these in the bond market!

On the flipside, when I'm evaluating a stock, I often try to find out what their bonds are currently yielding. Oftentimes I realize the stock only looks good because they're coasting on high leverage from cheap borrowings in the past, and that leverage is about to start working against them now! When you see such a situation, don't buy either their stock or their bond!

Other than that, it's a multi-way tradeoff between perceived credit risk, duration risk, yield to maturity, and current yield. Generally the market can be relied upon to optimize these things so it's a matter of fitting the factors to your needs. For example, I'm suggesting stuff with extreme duration and low coupons because I predict lower rates in the future, I want to maximize potential gains due to convexity, and I'm not relying on my fixed income portfolio for income. If you were relying on the portfolio for income, maybe you'd trade off some upside for a higher current yield and pick up bonds with CY's closer to 5%-6%. If you were less sure about rate cuts happening anytime soon, you might pick bonds with a lower time to maturity. If you thought rates were going to rise, you'd buy bonds with a year or less to maturity.

Note that time until maturity is not the same thing as duration. Duration is a mathematical calculation based on the timeframe of payments, so we can compare bonds across discounts/premiums and across high/low coupon yields. E.g. a higher-coupon bond with 12 years until maturity might have a lower effective duration than a lower-coupon bond with 10 years until maturity. Duration is sensitivity to interest rate changes. Investopedia can explain more on this point, and on the related subject of convexity. Do not underestimate how volatile boring old bonds can be!

Finally, I'm shying away from callable bonds or CDs right now because I want to capture the biggest capital gains in the event rates are cut. With a callable bond, even if I'm right they'll just pay me back early at par and issue a new bond at lower rates to replace mine. Maybe you're fine with such an outcome, want a higher coupon payment here and now, and foresee an environment of rate cuts as the point where you'd pivot back into stocks anyway. The bonds suggested above are technically callable, but not until many years into the future, so I'll accept that. This is another place where you'd tailor your screening to your needs, your risk tolerance, and the odds you place on various future outcomes.

[Alternatepriorities]

Thanks! You have a wealth of information here!

[GilesMM]

FRS has a stunning product, production hiccups to be sorted, and a low stock price.  Could be worth a flier.

[Alternatepriorities]

FRS has a stunning product, production hiccups to be sorted, and a low stock price.  Could be worth a flier.

Could you be more specific? When I googled FRS the first result is the Florida retirement system.

[ChpBstrd]

I put together a list of all the intriguing ideas on this thread to see how we're doing so far. This was never meant to be an investment contest, but I wanted to develop new ideas, examine rationales, and see which approaches to the thought process could be correct in hindsight. Every investment has a rationale, but usually they don't work out.

It took some work, but results are attached.

A lot of contributors didn't follow the Asset, Price, Rationale template, so I ignored most of these ideas. Insufficient motivation to list the price = insufficiently intriguing! Also, people changed their minds on a couple of ideas, but I'm considering everything mentioned and properly documented as held until now.

Some of the less liquid bonds had no offers listed today and I had to back into the estimated returns of some options strategies. Then there were the delisted shares like APE and BBBY to figure out!

Spoiler: show

Meme intrigue didn't go well.

I had suggested an annuity 0.12 years ago, so I just multiplied the payout rate by the portion of year consumed. You can get the same deal today but with payments starting later, so it seems like a valid way to price the choice to buy the annuity in the past.

Other than the annuity, this approach only looks at capital gains. That effectively penalizes investments like SGOV, which fluctuates each month with its dividend, or bonds. For example, my GEO group bond suggestion from January is down -1.15% in capital gains alone, but has paid enough interest for the total return to be +5.29%. Lots of assets are like that, but I'm out of time to calculate it all. Dive in and add dividends/interest payments if you're curious!

The average capital gain of all the ideas was -7.86%. Ouch!

My own picks were down -2.17% because of two large percentage losses on options plays (which would have been small allocations, but are equally weighted in the average) and my Pfizer suggestion.

Interestingly, out of 33 picks there were no grand slams. No NVDA or similar. Perhaps we're mostly playing it safe, with picks tilted toward fixed income, value, and safety. Or maybe there's nothing "intriguing" about Apple, Alphabet, Meta, or the other tech giants that rallied this year on AI enthusiasm.

[reeshau]

I don't see WAL on the list.  While my first post on 3/10 is about breakeven now, I was buying on both the deep March and May dips.  The daily prices don't begin to describe the volatility, and the availability at single digit prices for all of two mornings.  +91% as of yesterday, and today looks to be a good day, too.

A very satisfactory speculation.  We'll see if it continues as a long-term investment.

[GilesMM]

FRS has a stunning product, production hiccups to be sorted, and a low stock price.  Could be worth a flier.

Could you be more specific? When I googled FRS the first result is the Florida retirement system.

Oops. FSR.

[MustacheAndaHalf]

Interesting idea, measuring those past ideas performance until today.  Looking at my past investment ideas:

Vanguard Federal Money Market Fund (VMFXX), 7 day SEC yield 4.37%
...
I plan to hold cash (VMFXX) for 1-2 months ...

Cash gained half of 1% over 1.5 months

I hold a tiny position in TMV (-3x TLT) because I believe markets are underestimating the Fed's resolve on "higher for longer" Fed funds rate.  I'm not sure how many months I will hold TMV.

I sold TMV long ago, but Jan 19 2023 close $26.51 vs now $42.37 = +60%

Warning: do not try the following investment, you will lose everything.  I expect a number of -100% returns ...
Earlier this week, I bought OOM VIX calls.  Since the VIX may fall anyways and wipe out any investment, I might as well plan to lose 100% ...

I warned everyone not to do this.  I invested under 1/100th of my portfolio.  I can't lookup past VIX calls, but assuming my comments were right, -100%.

That's my current investment idea: hold SPY and QQQ put options until the March 21-22 Fed meeting and see where markets end up (I also hold shares of SQQQ).

SQQQ is easier to lookup.  Feb 24 close $39.79 March 22 close $33.86 = -15%

In a recent interview, Elon Musk claimed Teslas will be self-driving later this year.  ... You buy a Tesla Model 3 ($43k) now, and later the car starts to earn money as a robo Uber.

Idea was to wait for "full self driving", but if you sold early: New Tesla Model 3 currently $38k with used from last year $33k.  Guessing a used Tesla Model 3 sells for $35k = -20% loss.

Since I'm pessimistic, I'll pick the Power Buffer ETF with the lowest upside but maximum loss buffer.
https://www.innovatoretfs.com/etf/default.aspx?ticker=ujul

June 24 was the weekend, so call it June 26.
UJUL bought June 26 at close $28.63 with current price $28.55 = 0%

I sold my $UJUL shares today

My actual move beat holding until today:
July 19 close $29.19 vs $28.63 = +2%

Today I implemented a 94% SPY / 6% S&P 500 put option portfolio.
... I went with 2 year expiration.

I need to lookup my put options later, but I'd guess they protected against half of the 4% drop in S&P 500, leaving me with a guess at -2% performance

[Alternatepriorities]

After some thinking and looking i dipped my toes into the water with some of the US treasuries mentioned earlier. As someone looking at bonds with interest for the first time... How would you go about evaluating these four bonds against each other?

Joining the party late and celebrating early... I'm up 4% on this in the four days since Monday. Now I'll just assume I can expect those results to continue until 2050! I clearly never need to worry about money again, so it's time to become a youtube "Finfluencer". :)

[ChpBstrd]

After some thinking and looking i dipped my toes into the water with some of the US treasuries mentioned earlier. As someone looking at bonds with interest for the first time... How would you go about evaluating these four bonds against each other?

Joining the party late and celebrating early... I'm up 4% on this in the four days since Monday. Now I'll just assume I can expect those results to continue until 2050! I clearly never need to worry about money again, so it's time to become a youtube "Finfluencer". :)

Haha! Good buy and congratulations. I lacked confidence, so only sold puts on TLT at 85.50 for a buck a share, which expired OTM and left me without the shares. 10/19 was the recent peak in long-term interest rates, but I bought today because the thesis could be playing out and better late than never. To be clear, I think this is at least a 2 year trade, and these high duration bonds can go down as quickly as they go up.

[MustacheAndaHalf]

I'm taking the opposite view, buying put options on TLT:

expiration ... strike ... cost / share .. half bid-ask .. part day gain
2024-Jan-24 .. $90 ..  $4.00/sh ..... $4.20/sh ....... +5%
2024-Jan-24 .. $95 .. $7.67/sh ...... $7.925/sh ..... +3%

The market's sentiment flipped this week, resulting in the best week for markets in 2023.  While CNN Fear & Greed still shows "fear", it's almost in "neutral".  Prior surges in sentiment didn't last long, and so I wanted to act Friday before it ended.  As shown by the part day gain, my put options were already gaining before the market closed.

[Alternatepriorities]

After some thinking and looking i dipped my toes into the water with some of the US treasuries mentioned earlier. As someone looking at bonds with interest for the first time... How would you go about evaluating these four bonds against each other?

Joining the party late and celebrating early... I'm up 4% on this in the four days since Monday. Now I'll just assume I can expect those results to continue until 2050! I clearly never need to worry about money again, so it's time to become a youtube "Finfluencer". :)

Haha! Good buy and congratulations. I lacked confidence, so only sold puts on TLT at 85.50 for a buck a share, which expired OTM and left me without the shares. 10/19 was the recent peak in long-term interest rates, but I bought today because the thesis could be playing out and better late than never. To be clear, I think this is at least a 2 year trade, and these high duration bonds can go down as quickly as they go up.

Joking aside, my plan is to hold these until the next market dive that results in the fed cutting rates. If rates go up I'll buy a bit more. Rebalance into index funds again if rates go back down. I just couldn't see bonds as reasonable investment when interest rates had only one direction to move and the move must hurt bond values... Now it looks different, maybe I'm early and 5% this is the new "low" rate. Only time will tell, and as you pointed out the response to rate changes is asymmetric so it seem worth trying.

[MustacheAndaHalf]

Buying TLT is a crowded trade.

"The iShares 20+ Treasury ETF (TLT.O), the market's largest bond ETF and a bellwether for other funds, has seen $17.9 billion in net inflows year-to-date, Morningstar data showed. Its size has nearly doubled to $41 billion in 2023, making it the third most popular ETF in terms of flows this year."
https://www.reuters.com/markets/us/us-treasury-bond-etfs-draw-net-inflows-this-year-despite-recent-market-rout-2023-10-17/

[ChpBstrd]

Buying TLT is a crowded trade.

"The iShares 20+ Treasury ETF (TLT.O), the market's largest bond ETF and a bellwether for other funds, has seen $17.9 billion in net inflows year-to-date, Morningstar data showed. Its size has nearly doubled to $41 billion in 2023, making it the third most popular ETF in terms of flows this year."
https://www.reuters.com/markets/us/us-treasury-bond-etfs-draw-net-inflows-this-year-despite-recent-market-rout-2023-10-17/

I don't know if a treasury ETF could be a crowded trade, because there is no chance even a $39.5B monster ETF (Yahoo Finance market cap) like TLT could corner or bid up a market as big as the US treasury market. I.e. the treasury is issuing $24B of 30-year notes tomorrow, that one sale of that one type of bond in one month is the majority of TLT's size, and far greater than their inflows over 10 months. Plus, participation in treasury markets is much broader than, say, a commodity or shares in a single company. Finally, treasury issuance is increasing, which - unlike shares or commodities - can absorb the greater demand stimulated by higher yields. According to the Financial Times:

To satisfy its borrowing needs, the Treasury will raise the auction sizes of the two- and five-year notes by $3bn per month, with a rise in 10-year note auctions by $2bn and in 30-year bond auctions by $1bn. In August, the Treasury had increased its 10-year auctions by $3bn and its 30-year auctions by $2bn.

So the Treasury's announced increase in 30y bond issuance is, over the course of a year, most of TLT's market cap, and billions more than the $17.9B inflows into the fund. This gives us a sense of scale.

TLT is the thing to do if a person believes we're near the peak of this rate hiking cycle, and rate cuts could be on the way soon. The current treasury yield curve is consistent with the Fed Fund Rate futures market in the sense that both seem to be predicting the first rate cut about 6-12 months out. Of course, the market consensus can be and has been wrong. I'm more persuaded by the observation that rates don't go this high without breaking something big a year or two later. It's never been the case before that something didn't break.

The Treasury is tilting more toward short-term issuance, per the same article above. This suggests the Treasury is in agreement with the Federal Reserve's dot plot that rates will be falling over the next year or two. You might get a successful short term short trade on TLT, but I think it's a winner in the long term.

[MustacheAndaHalf]

expiration ... strike ... cost / share .. half bid-ask .. part day gain
2024-Jan-24 .. $90 ..  $4.00/sh ..... $4.20/sh ....... +5%
2024-Jan-24 .. $95 .. $7.67/sh ...... $7.925/sh ..... +3%

The optimism faded then TLT went sideways, so I sold these puts for +16% and +11% profit, respectively.  Combined they were less than 1/50th of my portfolio, so more like +0.27% overall.

[MustacheAndaHalf]

Buying TLT is a crowded trade.

"The iShares 20+ Treasury ETF (TLT.O), the market's largest bond ETF and a bellwether for other funds, has seen $17.9 billion in net inflows year-to-date, Morningstar data showed. Its size has nearly doubled to $41 billion in 2023, making it the third most popular ETF in terms of flows this year."
https://www.reuters.com/markets/us/us-treasury-bond-etfs-draw-net-inflows-this-year-despite-recent-market-rout-2023-10-17/

I don't know if a treasury ETF could be a crowded trade, because there is no chance even a $39.5B monster ETF (Yahoo Finance market cap) like TLT could corner or bid up a market as big as the US treasury market.

You equate a crowded trade to cornering the US Treasury market.  I have no idea where you pulled that from, but it wasn't my post.

There's some additional details in Reuters that the FT article left out:

"The Treasury plans to sell $112 billion in its quarterly refunding next week, which will raise $9.8 billion in new cash and refund $102.2 billion in securities. This will include $48 billion in three-year notes, $40 billion in 10-year notes and $24 billion in 30-year bonds."
https://www.reuters.com/markets/us-treasury-increases-size-most-its-debt-auctions-2023-11-01/

The "refund $102.2 billion" means that portion of the auction simply replaces one set of bonds with another set of bonds: "refunding is the process where a fixed-income issuer retires some of their outstanding callable bonds and replaces them with new bonds"
https://www.investopedia.com/terms/r/refunding.asp

Essentially the US Treasury will take $22 billion from one group of people and give it to another group of people.  One group is getting new 30-year bonds, the other group is losing their old 30-year bonds.  Is it fair to say "refunding" doesn't change supply and demand?

That leaves just $2 billion in new 30-year bonds for the market to absorb in this quarterly refunding auction.  I'm sure pension funds buy more than that - they need to match obligations with bonds to reduce uncertainty.  They don't speculate or care about yields as such - they have a fixed debt owed in the future, and they buy long dated treasuries to meet the obligation.

Setting aside TLT for a moment, every time the 10-year Treasury goes above 5.0%, the market buys them up and drives yields back below 5%.  There's incredible demand for high yield treasuries, and its not even limited to the U.S.   Japan insists on keeping rates low, so in the third largest economy, everyone sends their money overseas to buy bonds from other countries - especially the U.S.

I also changed my view earlier today - I think economists and businesses are better at forecasting inflation than I expect.  50 years ago, not so much - but the last 10 years, much improved.  Maybe that's from low inflation in the prior decade, or maybe it's from computer-driven data collection and analysis.  Doesn't really matter - I now expect inflation will be lower a year from now.
https://www.atlantafed.org/research/inflationproject/bie

[ChpBstrd]

Asset: SELF common stock
Price: $4.62
Rationale:
Here's a bet that antimustachian Americans will continue to hoard too much junk, to the point of renting self-storage units to hold it all. Global Self Storage is a small cap (or micro at $52M market cap!) self storage unit REIT selling for just over tangible book value and 4x sales. The company is conservatively leveraged, with debt/total assets of only 28%. Operating and net cash flows are growing rapidly. OCF went from $1.7M in 2019 to $4.67M in the last 12 months reported. FCF was roughly the same. The company appears to be very slowly deleveraging from their already low leverage. The company's only debt is reportedly a $17.53M mortgage due in 2036 at 4.192%. So they're largely immune to higher interest rates in the near term, but the stock has tanked alongside everyone else.

Delinquencies could rise in the event of a recession, but I think that might be partially offset by people needing a place to store stuff while they move. I also think SELF is an attractive acquisition target for a larger storage REIT. Milk the 6.44% yield while you wait for that to happen.

[index]

Asset: SELF common stock
Price: $4.62
Rationale:
Here's a bet that antimustachian Americans will continue to hoard too much junk, to the point of renting self-storage units to hold it all. Global Self Storage is a small cap (or micro at $52M market cap!) self storage unit REIT selling for just over tangible book value and 4x sales. The company is conservatively leveraged, with debt/total assets of only 28%. Operating and net cash flows are growing rapidly. OCF went from $1.7M in 2019 to $4.67M in the last 12 months reported. FCF was roughly the same. The company appears to be very slowly deleveraging from their already low leverage. The company's only debt is reportedly a $17.53M mortgage due in 2036 at 4.192%. So they're largely immune to higher interest rates in the near term, but the stock has tanked alongside everyone else.

Delinquencies could rise in the event of a recession, but I think that might be partially offset by people needing a place to store stuff while they move. I also think SELF is an attractive acquisition target for a larger storage REIT. Milk the 6.44% yield while you wait for that to happen.

Compare SELF to some of the other bigger storage REITs like EXR. SG&A as a % of revenue is over 22% compared to 7% for EXR and property expenses are a little higher than EXR as well. Operating margins are half of EXR and ROE is a little over a T-Bil. Company has also increased shares outstanding by 50% in the last 6 years. Cash from operations before depreciation isn't covering the dividend and they are paying it from issuing stock.

Since 2017:

Net income from operations: $6.7M
Debt issued: $5.45M
Stock Issued: $14.5M

they've spent:
$10.5M on RE
$7.9M of retiring debt
$14.13M on dividends

Essentially you can say they have funded dividends with stock issuance. ROE has averaged 2.5% the last 6 years.

[ChpBstrd]

Asset: SELF common stock
Price: $4.62
Rationale:
Here's a bet that antimustachian Americans will continue to hoard too much junk, to the point of renting self-storage units to hold it all. Global Self Storage is a small cap (or micro at $52M market cap!) self storage unit REIT selling for just over tangible book value and 4x sales. The company is conservatively leveraged, with debt/total assets of only 28%. Operating and net cash flows are growing rapidly. OCF went from $1.7M in 2019 to $4.67M in the last 12 months reported. FCF was roughly the same. The company appears to be very slowly deleveraging from their already low leverage. The company's only debt is reportedly a $17.53M mortgage due in 2036 at 4.192%. So they're largely immune to higher interest rates in the near term, but the stock has tanked alongside everyone else.

Delinquencies could rise in the event of a recession, but I think that might be partially offset by people needing a place to store stuff while they move. I also think SELF is an attractive acquisition target for a larger storage REIT. Milk the 6.44% yield while you wait for that to happen.

Compare SELF to some of the other bigger storage REITs like EXR. SG&A as a % of revenue is over 22% compared to 7% for EXR and property expenses are a little higher than EXR as well. Operating margins are half of EXR and ROE is a little over a T-Bil. Company has also increased shares outstanding by 50% in the last 6 years. Cash from operations before depreciation isn't covering the dividend and they are paying it from issuing stock.

Since 2017:

Net income from operations: $6.7M
Debt issued: $5.45M
Stock Issued: $14.5M

they've spent:
$10.5M on RE
$7.9M of retiring debt
$14.13M on dividends

Essentially you can say they have funded dividends with stock issuance. ROE has averaged 2.5% the last 6 years.

All true, there are diseconomies of scale with microcaps as illustrated by SG&A/Revenue, and the whole issuing stock while paying dividends thing makes it look like a dividend trap.

But whereas EXR sells for 1.58X book value, SELF sells for 1.07X. Whereas EXR sells for a price/FCF of 12.74, SELF sells for 10.76. Maybe EXR is the better investment, but how much better? 18.4% better?

In terms of riskiness, EXR has a beta of 0.63 versus 0.21 for SELF. EXR has a total debt/equity of 1.85 versus SELF at 0.36, which also explains why SELF has the lower ROE. These stats underly EXR's 52 week performance of -29.3% versus SELF's -5.2% in an era of rising interest rates.

So the intriguing part IMO is here we have an REIT which is immune to the current interest rate jitters because of the long-term nature of their modest debt, and is in what I consider to be a recession-resistant area. Thus they are well positioned to coast through the current high interest rate regime, or the sort of recessions which tend to follow high-rate regimes. Usually less-risky assets are more expensive, but in this case it's less expensive.

The ~6% dividend isn't much in a world where these can be obtained from AAA agency bonds, but the REIT has the advantage of being able to raise prices in response to inflation.

[index]

Asset: SELF common stock
Price: $4.62
Rationale:
Here's a bet that antimustachian Americans will continue to hoard too much junk, to the point of renting self-storage units to hold it all. Global Self Storage is a small cap (or micro at $52M market cap!) self storage unit REIT selling for just over tangible book value and 4x sales. The company is conservatively leveraged, with debt/total assets of only 28%. Operating and net cash flows are growing rapidly. OCF went from $1.7M in 2019 to $4.67M in the last 12 months reported. FCF was roughly the same. The company appears to be very slowly deleveraging from their already low leverage. The company's only debt is reportedly a $17.53M mortgage due in 2036 at 4.192%. So they're largely immune to higher interest rates in the near term, but the stock has tanked alongside everyone else.

Delinquencies could rise in the event of a recession, but I think that might be partially offset by people needing a place to store stuff while they move. I also think SELF is an attractive acquisition target for a larger storage REIT. Milk the 6.44% yield while you wait for that to happen.

Compare SELF to some of the other bigger storage REITs like EXR. SG&A as a % of revenue is over 22% compared to 7% for EXR and property expenses are a little higher than EXR as well. Operating margins are half of EXR and ROE is a little over a T-Bil. Company has also increased shares outstanding by 50% in the last 6 years. Cash from operations before depreciation isn't covering the dividend and they are paying it from issuing stock.

Since 2017:

Net income from operations: $6.7M
Debt issued: $5.45M
Stock Issued: $14.5M

they've spent:
$10.5M on RE
$7.9M of retiring debt
$14.13M on dividends

Essentially you can say they have funded dividends with stock issuance. ROE has averaged 2.5% the last 6 years.

All true, there are diseconomies of scale with microcaps as illustrated by SG&A/Revenue, and the whole issuing stock while paying dividends thing makes it look like a dividend trap.

But whereas EXR sells for 1.58X book value, SELF sells for 1.07X. Whereas EXR sells for a price/FCF of 12.74, SELF sells for 10.76. Maybe EXR is the better investment, but how much better? 18.4% better?

In terms of riskiness, EXR has a beta of 0.63 versus 0.21 for SELF. EXR has a total debt/equity of 1.85 versus SELF at 0.36, which also explains why SELF has the lower ROE. These stats underly EXR's 52 week performance of -29.3% versus SELF's -5.2% in an era of rising interest rates.

So the intriguing part IMO is here we have an REIT which is immune to the current interest rate jitters because of the long-term nature of their modest debt, and is in what I consider to be a recession-resistant area. Thus they are well positioned to coast through the current high interest rate regime, or the sort of recessions which tend to follow high-rate regimes. Usually less-risky assets are more expensive, but in this case it's less expensive.

The ~6% dividend isn't much in a world where these can be obtained from AAA agency bonds, but the REIT has the advantage of being able to raise prices in response to inflation.

it looks like the dividend trap is set to me. Income of 3M with 0.5M of debt to repay plus 3.3M in dividends. It's a negative 0.8M a year.  Debt cost is in excess of their 5.5% ROIC. So they have to increase share count or cut the dividend. TIKR has analyst estimates of revenue staying at 12M 2024 and going down to 11.8M 2025. Also they have a 4.6M debt repayment due in 2025.

[Alternatepriorities]

Can it still be an Intriguing idea is I don't know how to excuse it?

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/just-7-companies-are-carrying-the-s-p-500-in-2023-75823741

Basically the 7 biggest companies have given our index funds most of their gains this year. Their P/E is generally much higher than the index as a whole now. I expect a return to the mean at some point. Aside from selling shares I own in one of these that is not part of the index, is there a good way to increase exposure to the rest of the stock market while limiting exposure to the very largest companies? Avoiding a direct short as I expect the market may stay irrational longer than I could cover the cost.

[ChpBstrd]

Can it still be an Intriguing idea is I don't know how to excuse it?

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/just-7-companies-are-carrying-the-s-p-500-in-2023-75823741

Basically the 7 biggest companies have given our index funds most of their gains this year. Their P/E is generally much higher than the index as a whole now. I expect a return to the mean at some point. Aside from selling shares I own in one of these that is not part of the index, is there a good way to increase exposure to the rest of the stock market while limiting exposure to the very largest companies? Avoiding a direct short as I expect the market may stay irrational longer than I could cover the cost.

Use an equal-weight fund like RSP or QQQE. This way you have the same allocation to the smallest companies in the index as you have to Microsoft, Apple, Nvidia, etc.

Reversion to the mean doesn't have to happen. The biggest companies could keep getting bigger for a decade. Yet this approach avoids the risks of a megacap bubble while maintaining the overall market's upside potential.

[MustacheAndaHalf]

Basically the 7 biggest companies have given our index funds most of their gains this year. Their P/E is generally much higher than the index as a whole now. I expect a return to the mean at some point. Aside from selling shares I own in one of these that is not part of the index, is there a good way to increase exposure to the rest of the stock market while limiting exposure to the very largest companies? Avoiding a direct short as I expect the market may stay irrational longer than I could cover the cost.

I usually track this with SPY (+10%) and RSP (-4%) over the past 12 months (rather than YTD).  One pitfall of avoiding "the magnificent seven" is shown by the Russell 2000 $IWM (-10%).  Tiny companies have a lot more debt than the S&P 7.  That debt costs more to refinance, putting smaller companies at risk of default.  The top 7 stocks can't default on debt they don't have - their balance sheets are overflowing with cash.

[Alternatepriorities]

That's a good point about debts. Years ago when Apple was being beat up after the death of Jobs I decided the numbers didn't really make sense and bought a tiny little slice a few weeks or months before news broke Icahn and Buffett were buying. It's been a very nice boost in my Roth. But after 30% plus growth this year it's over 10% of my portfolio including the index funds and Brk.b shares. I don't want to be quite that heavily dependent on one company. Figured if I'm going to move the money somewhere else maybe i should look for something without as heavy exposure to those mega caps. Of course I could be very wrong on this...

[Financial.Velociraptor]

Sell to open XLU231215P00060000

Most intriguing?  I suppose if you value safety and income over beating the market.  I'm 11 years post FIRE date and I resemble that!

That's the 60 strike (at the money) put on XLU with 15DEC2023 expiry.  Annualized yield is coming in over 18%.  Good returns for a utility stock ETF.   Downside is being put 100 shares of a very defensive stock during uncertain times.  Yield would be a little over 3.5%. 

Right now, Utilities are getting sort of beaten up because the 10 year Treasury yields more.  Bonds are just a better bet for retirees who value security over return.  With the Fed signaling we are at least "close" to peak FFR, we should be near a bottom in XLU pricing.  And when/if the 10 year yield falls, XLU should rally as it  becomes relatively higher yielding than the 10  year. 

I sold one of these contracts with 1.08 in premium received.  If I'm am assigned, I will write covered calls at the 60 or higher strike for however long I can extract 7.5% or better annualized.  I'll be holding without a stop and selling when my shares are up 30%, e.g. at $78/share.  If I am not assigned, I will continue writing at the money puts until assigned or the yield falls below 9%.

This is an intermediate term play targeting about 3 years holding period.  XLU is arguably a good "forever hold" as electrification of transportation (and many other things!) is going to cause electric utilities to grow at double or more the historical 2% rate.  Most of the underlying businesses are government mandated monopolies with guaranteed margins.  For some investors, this might be a part of or replacement for an income (bond/pref/etc.) allocation.

[Financial.Velociraptor]

CP Arbitrage on SPY

This seems hardly possible under EMH.  The market is pricing irrationally  According to Yahoo! Finance, SPY is at about 438 as of this writing.  The 19JAN2024 calls and puts at 438 strike are priced at 12.03/8.75, respectively.  There is a riskless profit to be made by opening a synthethic short at 438 and going long the shares as a hedge.  Regardless of what SPY does during the holding period, you profit the spread between calls and puts. 

[reeshau]

From Morgan Housel's new book, Same As Ever:

"The only way to know we’ve exhausted all potential opportunity from markets—the only way to identify the top—is to push them not only past the point where the numbers stop making sense, but beyond the stories people believe about those numbers."

He doesn't say it directly, but I have dubbed this his definition of "price discovery."

[MustacheAndaHalf]

CP Arbitrage on SPY

This seems hardly possible under EMH.  The market is pricing irrationally  According to Yahoo! Finance, SPY is at about 438 as of this writing.  The 19JAN2024 calls and puts at 438 strike are priced at 12.03/8.75, respectively.  There is a riskless profit to be made by opening a synthethic short at 438 and going long the shares as a hedge.  Regardless of what SPY does during the holding period, you profit the spread between calls and puts.

As I understand it, you're suggesting (at current $440/share price) :

buy 100 shares of SPY for $44,000
sell call with 2 month expiration for $1172 (bid price, worst case)
buy put with 2 month expiration for $857 (sell price, worst case)
You gain $315 on a $44,000 investment = 0.715%

2 months is 1/6th of a year, Vanguard Money Market Fund paying 5.3%:
5.3 / 6 = 0.883%

I think it still wins because of two scenarios with dividends:
(1) you hold SPY shares in mid December, and receive a dividend of over 0.3%
(2) the shares are called away within a month, and cash earns half of 0.883%

[Financial.Velociraptor]

weekly at the money bear put spreads on VXX.

I wagered 5k or so on the 18.5/19 strikes (splitting the money, underlying was at 18.84) bear put spread on VXX expiring on the 24th.  I got 32 cent pricing.  Should the price move another 5 cents down, I'll make the maximum return of 56.3% in 7 days!  What I like about this is the repeatability of the trade.  I'm setting a hard stop at 50% or 16 cents for the spread.  Thus, I'm risking 50% to earn up to 56%. 

With the natural state of the futures market being contango and VXX consistently losing over 60% a year, it seems like that bet will pay off more often than it will go sour.  That's up to 2,566% possible before considering the 52 compounding periods! 

I'll report here the results of the next six weeks or so of trading this strategy here.

[ChpBstrd]

Asset: SPY 440 strike puts expiring 1/16/2026
Price: $2,970 per 100 share contract
Rationale:
$VIX has collapsed down to 13.2 amid a wave of investor enthusiasm. That means options are on sale again. The puts I chose to buy today have a 2.16 year duration and start off in the money by $13.34 per share. The remaining $16.36/share time value is a relatively low price to pay for hedging a $453.34 fund. Over 2.16 years that amounts to 3.03% per year to insure SPY against any drop greater than 2.94%. That's historically cheap!

The last time I ran this play in June or July at a similar level I sold the put for a 30% gain only a few weeks later, as implied volatility went up for reasons long since forgotten. It would be historically unusual for $VIX not to hit 20 again sometime within the next 4 months. 

If $VIX keeps falling I might buy a call to accompany my put.

[roomtempmayo]

Aside from selling shares I own in one of these that is not part of the index, is there a good way to increase exposure to the rest of the stock market while limiting exposure to the very largest companies?

If the goal is to stay diversified while minimizing exposure to big tech, Fidelity's sector funds are a reasonable option that are unlikely to blow up in your face.

https://www.fidelity.com/sector-investing/overview

[Alternatepriorities]

Aside from selling shares I own in one of these that is not part of the index, is there a good way to increase exposure to the rest of the stock market while limiting exposure to the very largest companies?

If the goal is to stay diversified while minimizing exposure to big tech, Fidelity's sector funds are a reasonable option that are unlikely to blow up in your face.

https://www.fidelity.com/sector-investing/overview

Listening to someone who was able to use the apple AR headset gush on and on about how much better it was than any other VR experience he'd enjoyed and draw repeated parallels to the iPhone in '07 makes me question if maybe it's just me that's becoming a luddite. I'm over here figuring out how to install Sonoma on a 2014 MBP because I haven't felt compelled to upgrade in 9 years... Makes me question my theory that tech has gotten overhyped... Maybe it's just me.

[Financial.Velociraptor]

weekly at the money bear put spreads on VXX.

[snip]

I'll report here the results of the next six weeks or so of trading this strategy here.

Cleared 2,720 in profit over the weekend. 51.5% nominal return before commissions.

[Financial.Velociraptor]

weekly at the money bear put spreads on VXX.

[snip]

I'll report here the results of the next six weeks or so of trading this strategy here.

24NOV2023 - +2,720 - 51.5%
30NOV2023 - (2,800) - -28.0%

TOTAL (80)

Current week had 10,000 at risk.  By lunch time Thursday, strikes were just outside of the money.  Sensing my investment was threatened sold for a loss before hitting my stop loss.  Will re-enter the trade tomorrow (Friday)/

[ChpBstrd]

Asset: Pfizer (PFE) common stock
Price: $40.57
Rationale: With a forward PE of 11.7, this pharmaceutical blue chip is priced like a value stock, despite its 36.4% ROE, 21.4% ROI, 31% profit margin, and 22.7% 5-year GAAP earnings growth!....

Oof! This call is turning out terribly. PFE is now a $29 stock, down 28.5% over the past few months.

The latest news is Pfizer having a tough time with their answer to Novo Nordisk and Eli Lilly's obesity drugs:

The company said high rates of adverse events were observed among patients in the study, with up to 73% experiencing nausea, up to 47% vomiting and up to 25% experiencing diarrhea. More than 50% of patients across all dose sizes stopped taking the pill...

https://www.cnbc.com/2023/12/01/pfizer-to-discontinue-twice-daily-version-of-weight-loss-pill.html

In response Pfizer is discontinuing research on a twice-daily pill, and is instead looking at whether they can make a once-daily pill work. However, even the patients who continued the pills lost less weight than reported in studies of competing medications.

Investors appear to be betting Pfizer will completely miss out on the hormonal weight loss market, and that they've hit a dead end with no competitive product in the obesity drug pipeline. Back in February Pfizer appeared cheap and in line to compete with NOVO and LLY, but subsequent events proved the difficulty of predicting the outcomes of drug studies. LLY now has a PE of 107 and NOVO a PE of 41, compared to PFE's 15.87.

[ChpBstrd]

Asset: Hawaiian Airlines (HA) common stock
Price: $13.55
Rationale:
Alaska Airlines just offered $18 per share to buy HA. I would expect the deal to be consummated some time next year, unless scuttled for antitrust reasons. I see no reason for that to be the case, as there are several airlines in these markets. At worst, the deal could be delayed like the Microsoft / Activision merger.

So a patient person could make 32.8% when the deal goes through.

[Alternatepriorities]

As someone who flys primarily on Alaska Airlines I’m optimistic about the deal. With any luck it will much more direct flights from Anchorage to the South Pacific. Any guess as to why the markets are lagging the offered price?

[ChpBstrd]

As someone who flys primarily on Alaska Airlines I’m optimistic about the deal. With any luck it will much more direct flights from Anchorage to the South Pacific. Any guess as to why the markets are lagging the offered price?

#1 is the risk the merger doesn't happen. HA is up 177% today, so in theory a "no" answer from regulators or Alaska Air finding a reason not do do the deal during their due diligence could send the stock back to Friday's price of $4.80!

#2 is the time value of money. E.g. if delays mean it takes 2 years for the shareholders to be paid their $18, what did the rest of the stock market do in that time? Does it go up 32%?

To me the intrigue is that I think the merger is highly likely to happen, and independent from the performance of the rest of the market. So a bet on the merger happening may be counter-correlated with stock market performance, and yet you're looking at stock-market like returns - actually much better. The stock market could stink next year and this bet could still pay off.

[reeshau]

Interesting angle on HA: they just started a crew contract with Amazon.

https://finance.yahoo.com/news/alaska-airlines-fly-amazon-packages-002619310.html

[MustacheAndaHalf]

CNBC contributors pointed out that even when regulators have said "no" to mergers, they have been losing in court.  So another factor in favor of the HA + ALK merging taking place.
---

Bitcoin's price is volatile, and the price of companies investing in Bitcoin is also volatile.  All of which means a very high price to buy put options on Bitcoin or stocks related to Bitcoin.  But Schwab lets me short stocks while only forgoing lousy interest payments - I'm shorting for almost nothing.

So that's what I did today, opening a short position on $MSTR ($562.79/sh currently).  A short position profits off drops - I sell a share I do not own now, and have $572.79 in cash but also -1 MSTR shares.  If the stock price drops, I buy my negative one share back at a cheaper price, and keep the extra cash.  Or the opposite - I need to spend more cash if it goes up, costing me money (losses).

So my investment idea for today is shorting $MSTR stock at $562.79 per share.

I will amend this idea later if a spot Bitcoin ETF gets announced, because I plan to add to my short position when that happens.  A $75 billion jump in Bitcoin market cap is disproportional to the new money that I expect in spot Bitcoin ETFs.  I think the hype is getting ahead of itself.

[ChpBstrd]

Asset: Eli Lilly (A1/A+) bonds maturing 9/15/60, call protection until 3/15/60, (CUSIP: 532457BZ0)
Price: $513.44, YTM: 5.655%, current yield 4.87%

Asset: Public Service Co New Hampshire (A1/A+) bonds maturing 9/1/50, call protection until 3/1/2050, (CUSIP: 744538AD1)
Price: $510.84, YTM: 6.143%, current yield 4.7%

Asset: Astrazeneca (A2/A) bonds maturing 8/6/50, call protection until 2/6/50, (CUSIP: 046353AX6)
Price: $521.21, YTM: 5.597%, current yield 4.07%

Asset: Entergy Arkansas (A2/A) bonds maturing 6/15/51, call protection until 12/15/50, (CUSIP: 29366MAB4)
Price: $530.71, YTM: 6.232%, current yield 4.99%

Rates fell as I predicted, so I thought I'd look up these bonds to see how they were doing a few weeks later.

Eli Lilly: $598.64, up 16.6%.
Public Service Co New Hampshire: $589.91, up 15.48%
Astrazeneca:$608.90, up 16.82%
Entergy Arkansas: $598.36, up 12.75%.

I was initially surprised by the size of these moves, because they exceed the change in lower-yielding, and in theory higher-duration ETFs of government bonds like ZROZ (up 14.78% since 11/9, effective duration 26.38 years) and EDV (up 12.94% since 11/9, effective duration 23.97 years).

Something seems amiss when, for example, the New Hampsire bond yielding 4.7% seems to appreciated as much as treasuries with much lower yields. In fairness, ZROZ manufactures a yield, so maybe this is it. Both ZROZ and EDV trade at a premium to NAV now, and expansion of that premium probably explains some of this unexpected surprise. Plus there has been a general risk-on attitude stimulated by positive economic news that may have compressed the risk premium. Animal spirits exist in the world of bonds too.

So I wish I had bought my own recommendations here. I could be generating a 4%+ income stream while eating popcorn and watching rates fall. Instead I'm just eating popcorn and watching rates fall.

[Financial.Velociraptor]

weekly at the money bear put spreads on VXX.

[snip]

I'll report here the results of the next six weeks or so of trading this strategy here.

24NOV2023 - +2,720 - 51.5%
30NOV2023 - (2,800) - -28.0%
07DEC2023 - (6,076) -  -60.9%
TOTAL (6,156)

Had 10,000 at risk for the week.  I deviated from the trading plan of splitting the strikes around the money (one in/one out) and selected two strikes out of the money.  e.g. I got greedy and went with a trade more aggressive than the plan.  Had I stuck with the plan, I'd still be in the trade and with a mark to market gain.  Instead, I stop out today with a 6,076 loss.  I'm going to work real hard on taking that lesson to heart and sticking to the gameplan going forward.

I will not reenter the trade for next week as I have a legacy 6-8 week position already expiring that Friday and don't want to double my exposure.  I'll count that as as part of my weekly trade results even though it is a less risky trade.  Is currently safely in the money and set to return 8,658 in profit.

Next trade 18DEC for the 22DEC expiry.