Swiss portfolio update and a speculative bond


"Dear Readers,

We still have not uplifted our underweighting of equities. We think the markets have not yet finished the bottom finding process and investors still lack confidence. A one step forward – two step backward pattern has been established over the last few weeks. Investors get in on very weak days out of fear they may miss the next bull market and get out again soon out of fear they may lose money. There hardly can be a real bull market anytime soon – still too many obstacles around for that; however, short term trading with your existing positions and with some new items seems excellent in this market environment. Our today's list shows you the trading range we keep observing – concentrating on stocks with which we would also feel comfortable in the long term if a real sell-off still were to spoil the party in the short term.

And if things really get bad, the table below shows you how bad it already was for a few household names over the last 3 years. It is household names only with products each of you is familiar with and shows the all time high and recently established low and the percentage difference.

 

     Company       Year of Absolute   Absolute High    Recent Low   Difference



Xerox 2000 $62 7/24/02 $4.60 minus 92.5%

Who has never Xeroxed a document?



Hewlett Pack 2000 $75 7/24/02 $12.72 minus 85.7%

What do you use for printing?



Ford Motors 1999 $68 8/14/2002 $10.65 minus 84.3 %

A nice car to drive?



ATT 1999 $63 7/24/2002 $8.20 minus 87 %

Telecommunications?



AOL Time W. 1999 $92 7/25/2002 $8.70 minus 90.5%

You know the movies and the internet.



Disney 2000 $44 8/08/2002 $13.50 minus 69.3 %

Just the movies and fun parks.



Credit Suisse Grp 2000 $94 7/24/2002 $27.64 minus 70.6 %

A global player in finance.



ABB (Brown Bov) 2000 $55 8/16/2002 $5.44 minus 90.1 %

Infrastructure and technology since 1883.



Swiss Life 2000 $1480 7/24/2002 $143.00 minus 90.3 %

Life insurance since 1857

These are to name just a few; and these are not the high tech bubble that really bounced, but some of the blue chips of our era.

Enjoy reading the enclosed NY Times clippings and our list of possibilities and good investing to all of you." Andy

Andy's view above is most conservative.

Now here is a letter from a reader asking about speculation.

"A financial advisor talked to an investment committee I am part of today, suggesting that the purchase of Worldcom bonds could be a very good speculation at the present time.

"He paints a picture of a sound basic business that was over extended, had too much debt, got involved in shady practices, and collapsed, virtually wiping out stock and bond holders prior to the bankruptcy. However he feels that at about 12 cents on the dollar, the bond's current downside is minimal, and upside varies from 20 to 60 cents on the dollar over the next few years depending on the results of the Chapter 11 restructuring. WorldCom's cash flow is positive, it has a large pool of cash that is growing each month (mostly derived from long term contracts to deliver telecom services) and even if broken up and sold off in pieces, would return much more than 12 cents on the dollar to bond holders. He claims that professional bond fund managers he has talked to are accumulating this debt for their portfolios.

"I am nervous about the economic environment — if the recession continues and/or deepens, will WorldCom be able to continue to have positive cash flow in its internet backbone, long distance telephone and other businesses? And if it does, will that translate into bond value improvements, given the overall market for bonds of this type?

"Any thoughts from you or your experts on this topic would be greatly appreciated."

I asked eClub advisors about this bond and here is what I learned.

Teddy Christiansen replied:

"I am fond of high yielding corporate bonds but prefer Government Bonds, as our whole society and world order depend on individual countries.

"Would you have invested in bonds Swiss Air or Dutch Telecom (had there been any?) You would have lost all your money and these two companies were not targeted in any fraud as Worldcom is.

"Would you prefer to give a to a friend who has everything in good order, but is only willing to pay a low rate – or would you prefer earning higher yields by lending to a friend who absolutely has not been in a good order lately? We may not have seen the last of Worldcom's troubles yet.

"Corporate bonds are Subordinated Capital. In other words this is a loan to the company with no collateral other than the company's good name and image.

"I feel Worldcom bonds are extremely speculative. There certainly is the potential to make money but there is a real chance of loss as well. I do not know the customer's financial position but I would tell him to invest only as much in these bonds as he is willing to lose." Teddy

You can learn more about Teddy Christiansen's services at http://www.garyascott.com/advisors/538/.

EClub advisor Larry Grossman was not too hot on the bonds either when he wrote:

"There are many reasons to stay away from these bonds in particular, as well as bonds in general. First the economy could continue to meander or even weaken. You want to own high yield, (junk) bonds in a strong economy, not a weak economy. I also do not believe we have seen the last of the bad news yet on the telecom sector and as long as the sector remains under pressure this does not bode well for Worldcom. There is also excess capacity in this industry and we continue to see this business commoditized. Frankly, it would not surprise me to see long distance for free in the future as the telephone companies continue to drive the price down and are also being forced to do so by the cellular providers. The money will be made elsewhere in this industry. Lastly, we could be entering a period of rising interest rates within the next 12-18 months and this will put downward pressure on these bonds as well.

"I feel if you are going to make a speculative bet, there are much better places to do it. Please feel free to contact me should you need additional information or are interested in alternative investments. My last piece of advice is stay away from commission based advisors in this environment as they make money from activity and the spread on bonds such as these can be huge." Larry

You can learn more about Larry's services at larry.grossman@garyascott.com.

We have already seen how conservative EClub advisor Andy Kaegi is so this reply is no surprise.

"A pure speculation, only for people prepared to lose what they invest. Some companies in fact do come back to business after Chapter 11; but Worldcom in my opinion is in the wrong industry to have a fair chance at the present time. Whether you pay 12 cents or 5 cents on the dollar does not matter in this case. Argentina at 20 cents on the dollar is a better bet, but this is a country and not a private company from a former high flying industry. I doubt that professional bond fund managers will take any action here as they are not supposed to speculate. We have a similar case here in Switzerland with former Swissair that is trading at 4.5 cents on one Franc; but here there are estimates that final bankruptcy dividend should finally be between 7 and 10 cents. In an industry like Worldcom nobody can make any serious estimates in the present economic environment. If you are an investor don't do it, if you are a speculator go to Las Vegas." Andy

You can learn more about Andy's services by emailing akaegi@bpcs.ch.

Charles Drace in New Zealand had some appropriate remarks as well.

"I suggest that no one can adequately answer your query as no one really knows the state of Worldcom. Worldcom may be in better shape under Chapter 11 than before, but we mustn't forget that in order to show a profit before, Worldcom had to juggle the books in a dramatic and illegal way. I couldn't help thinking while reading the comments you passed on from the investment advisor that many of the positive phrases he used about Worldcom were almost identical to what advisors were saying about Worldcom (and others) before the collapse.

"Therefore, I advise you to treat this as a pure speculation and don't buy the bonds unless you're comfortable with the distinct possibility of losing the whole lot. That's not to say you shouldn't do it…. after all, there are probably many stocks in your organization's portfolio that will lose more than 12 cents per unit in the next year or so." Charles

For more about Charles's service email charles@cdrace.co.nz.

Jyske bank was not very keen either. Here is Thomas Fischer's report:

"I spoke to our Telecom expert and have the following comments: When investing in Worldcom bonds you are taking a gamble on whether you can trust the information available. Worldcom has not exactly been the most trustworthy corporation.

"Furthermore the US macroeconomy in general and the telecom sector in particular has to improve in order for investments to increase. It is difficult to see any telecom corp. in the US capable of paying a decent price for the worldcom parts however valuable these might be.

"Our traders have not seen any big buyers in the market and the price has moved between 11-14 cents but the traders say that gamblers are moving in as they see a limited downside. Conclusion: it's a gamble." Thomas

For more on Jyske bank go to http://www.jbpb.com/

That makes five for five that says watch out! If my additional comments are required, I say "go pick raspberries". If you do not know what this means go to http://www.garyascott.com/inspired/642/. Until next message, may all your investing help the globe! (and make a profit as well)! Gary


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