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Frontier Justice

May 19, 2013

Drama. In the pursuit of bond yields that are not available in Europe and North America, wealthy bond investors and sovereign funds are searching into the deep South, and the New West, across the Pacific Ocean, to Vietnam and then Romania, and not stopping until they reach Austria, absent Greece, Cyprus, and a few other places, we suppose (Reuters, May 19, 2013, Analysis: Frontier Markets booming but risks mounting).

For example, Paraguay is a first-time issuer and has no track record of re-paying foreign investors (unlike its neighbor, Argentina (2002), which has no track record of re-paying foreign investors), but Paraguay has successfully auctioned off $500 million of its sovereign bonds to grateful buyers at the rate of 4.625% per year for ten years, which is a lower rate than the General Electric Company’s ten year bonds at 5.2% (ibid, Reuters) but still higher than GE’s dividend rate of 3.3%, and, after all, it’s also a lot less money than the $8 billion that GE expects to spin out to its shareholders this year, some of whom will be holding these bonds in their Emerging Markets Fund or pension plan which are trying not to lose it (please see our recent Post, The Pensionnaires, May 2013).

And, anyway, it’s only tomorrow’s income for GE which is currently $150 billion per year and merely three times the GDP of Paraguay and its seven million people, who woke up this morning with a new $70 debt and commitment to interest payments of just $3.50 per year, each, which might justify the higher rate for GE even though it’s well-known that GE doesn’t really need our money at the present time, and is also much less willing to share than in the past and has bought in nearly 20% of its own equity in the last several years, surely an alarming trend that might cause us to look elsewhere to invest our idle cash.

This is confusing, and it’s possible that $500 million just doesn’t mean anything in the larger scheme of things, and, perhaps, we could use that argument with our employer or the IRS and Canada Revenue Agency who are also desperate to round-up a few offshore accounts of several millions and collect their taxes.

Exhibit 1:  Asunción, The Capital City of Paraguay

File:CAPITAL DE PARAGUAY.jpg

The Capital City of Paraguay

On the plus side, investors are picking and choosing their holdings by doing due diligence including traveling to the country and talking to all sectors of the society, although that hardly seems possible if we understand the political situation correctly.

Or maybe we do, because many emerging market investors have offices and boots on the ground throughout the world to stay on top of the regions’s political and economic pulse.

And, undoubtedly, the North American equity markets are a bit small, at $20 trillion, even with the +15% gains of the last several months, for which we should be cautious rather than grateful, because Risk-On is likely soon to become Risk-Off (please see our recent Posts, Risk-On/Risk-Off and The Real Intelligent Investor, both in May 2013) and the entire Canadian equity market is under $2 trillion, and still available and wanting at bargain prices for anyone interested in tar pits, uranium, potash, gold mines, and other heavy metals that we have discussed in some of our previous Posts (for example, The All Canadian Four Play, October 2012, or Black Gold In The Canadian Oil Patch, April 2013)

Nevertheless, we thought it wise to look at the GE situation in view of this information, but found nothing wanting. The expected downside volatility in the stock price is still minus ($1.50) so that we should not be surprised at any price between the current price of $23.50 and $22 or $25 in the next several months.

However, the stock is trading substantially above the current Risk Price (SF) of $19 (please see Exhibit 2 below) and, so, we’ve decided to protect the price and our gains above $18 since early last year by buying a collar with some of our profits and dividends; the August put at $23 is available at $0.73 per share today and we sold an offsetting call at $25 for $0.23 per share so that for a cost of holding the stock at $23.50 and the collar at $0.50 per share ($0.73 less $0.23), we can go on vacation, collect our dividends, and expect to hold the stock between $23 and $25 for the next several months, regardless of what we don’t know about the company, or an alleged emerging inflation that might yet strike us down (please see our Post, Bubble-mania (Econo-speak), May 2013).

Exhibit 2: (B)(N) GE General Electric Company – Risk Price Chart

(B)(N) GE General Electric Company - May 2013

(B)(N) GE General Electric Company – May 2013

General Electric Company provides services ranging from aircraft engines, power generation, water processing & household appliances to medical imaging, business & consumer financing, media content & industrial products.

(Please Click on the Chart to make it larger if required.)

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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