Welcome to Income Securites Advisors



FEATURED ARTICLES
Each month, the newsletter will have articles on new developments in the fixed income market as well as educational and informational pieces designed to expand our readers knowledge and understanding of these securities. A library of such past articles as well as of the columns done by Richard Lehmann in past issues of Forbes are available to member subscribers.


BUY HOLD OR HOLD
Wall Street has developed its own language concerning Buy, Hold and Sell recommendations and we thought a translation would be in order. A little background first. Most analysts work for brokerage firms that earn their living by underwriting stock offerings. Thus, companies followed by analysts are also current or potential future customers. In order not to offend them, analysts are loath to rank a company a sell, but instead use the euphemism “hold”. Euphemisms have taken hold and caused some “rank inflation” where a buy is actually a hold and only a “strong buy” is a real buy. A sell is a “we will never do business with this company again” ranking. In the income security arena, and particularly in this newsletter, buy and hold have somewhat different meanings than in WallStreetSpeak. There is a vast difference in holding a common stock and holding an income security. Just holding an income security derives income, while holding a common stock has no upside, unless the price moves. The meaning of the word “hold” has a positive meaning for income securities, while having a negative mean-ing for common stock investing. No movement in price is just fine for income investors while it is “dead money” for common stock investors.

EBOLA EARNINGS BEFORE….
For a brief period in the 1970s, shareholders had the convenience of being able to quantify and compare companies by looking at one number, PAT or profit after taxes, to evaluate a company’s performance. In these simpler days it was thought that what should matter to shareholders was how much money was actually earned for them, much like your take home pay. In fact, I believe the term ‘bottom line’ sprang up about then. The problem with this standard was that it was too demanding on managements, so variations began to appear. Today, we rarely see the term PAT in corporate pronouncements, although it is still the bottom line of the income statement. No, today the in-vogue term is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortizations). However, once shareholders showed tolerance for this variant, new ones began to appear. Recent examples include EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortizations and Rent). If they deducted a couple of more items, the number would closely approximate sales! Another favorite is FFO (Funds From Operations). Sounds a whole lot like cash flow doesn’t it? All this playing with operating results lead us to create our own candidate for favorite earnings caption, EBOLA (Earnings Before Occasional Losses and Adversities).

ROULETTE OR POKER?
There is a continuum by which success is gained by different proportions of luck versus knowledge. The game of roulette depends solely on luck; there is no strategy or knowledge that can improve the odds of winning. In Poker, knowledge of the odds, in changing circumstances, greatly increases one's chances of being a consistent winner, especially when playing against inexperienced players. In the investment arena the same relationship between the two variables is at work. One can make a literal fortune by dumb luck or take a large loss even when the reasoning was sound. However, over the long run, knowledge in the investment arena will win out over luck. Much as a good poker player will win in the end despite the vagaries of luck. Case in point; There was an attractive railroad bond with a decent coupon, call protection, long maturity and good credit rating. We started to investigate it for a possible recommendation, only to find out that it was not making its annual payment due April 1. Further investigation revealed it was a non-cumulative bond, meaning the bondholder was out of "luck"

E.T. BONDS
If only buying bonds was as easy as buying stocks. Finding the price of a stock. Is easy. Turn on the TV, check the financial pages or punch in the stock symbol on any of a thousand Web sites. Pricing and then buying bonds is more like house hunting. It¹s kind of like calling a real estate agent and asking him what a 2,500 square foot house costs. If the agent is familiar with the neighborhood, you might get an immediate answer that approximates the current market value. If the agent is unfamiliar with that part of town, he will need to call other brokers who know the area. Wall Street brokers go through much the same process when you ask them for the price of a bond. Unless you keep your account with a full service broker your chances of success may be slim. If your brokerage firm doesn¹t have the bonds, they will try to either persuade you to switch to another bond in his firm¹s inventory or failing this, call a competing brokerage to get a price. However, you will have no idea if it is a good price. In many cases a broker will buy the bonds himself as a principal and resell them to you at a markup. The amazing thing is that bond brokers who do this often will only tell you that they can get them for you without a commission! Unlike stocks, the Web has neither demystified nor democratized the bond brokerage business. So far, the promise of a transparent and liquid market for bonds has not materialized. A few ambitious Internet bond sites have given up, and even the NYSE has closed its bond exchange within the past month. There are a few Web sites like Tradebonds.com that will post prices and connect you to a dealer. But most of the times the prices are stale. Within the last two years a few brokerage houses have attempted to bring bond investing to retail investors. Firm¹s like Salomon Smith Barney have created new securities that slice existing bonds up into smaller pieces and list them on the New York Stock Exchange. These CoRTs (Corporate Backed Trust Securities) act like preferreds because they have a $25 par value and trade without accrued interest. Ownership of the CORTS makes you a beneficial owner of the underlying bonds. In order to spur demand the underwriters have been pricing these at higher yields than the identical bonds of the same issuer. Paine Webber and Lehman Brothers have versions known as "CABCOs" (Corporate Asset Backed Corps) and "CBTCS" ( Corporate Backed Trust Securities). Some companies are even issuing such securities directly. Because the individual brokerage houses have copyrighted their products brand, we will refer to them as E.T. Bonds or Equity Traded Bonds. I think this trend will be big and it makes pricing the bonds as easy as typing in a stock symbol. Check my recommendation list for CORTs from JC Penney and Countrywide Credit. These not only make good bond substitutes, but also, are a good alternative to high dividend stocks or preferreds.