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(B)(N) Allianz SE & The Bond Market

June 18, 2013

Drama. The bond market is a team sport. Everybody does the same calculations in the same way and one bond trader is the same as another bond trader with the difference that they might have different amounts of money, different types of bonds, different currencies, and they might have a different idea about how interest rates or exchange rates could change. Are we bored yet?

Exhibit 1: Consider today’s decision factors in today’s U.S. T-bill market

US T-Bill Auction - June 18, 2013

US T-Bill Auction – June 18, 2013
Courtesy: Treasury Direct

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

The Bond Market

It’s not an easy job and the mortality rate at the bond desk is high, but those who last become icons of the industry and very wealthy. However, the key to successful investing in the bond market is not to hold them to maturity but to trade as often as possible using the government rates as a bogey.

The “bond market” is, effectively, a “shell game” and does not add “value” but merely takes it or gives it back, net of execution costs and the occasional trader who makes some bad calls and loses their desk and telephone.

At $100 trillion, the bond market is twice as large as the global market for equities, and, roughly, $1 trillion is traded every day in an over-the-counter market exclusive to institutions and broker-dealers, so that, in the course of a year, the bond market will turnover 2× or 3× very much like “tinned goods” at the grocery store, or the ball in an NFL championship game.


Courtesy: PIMCO & Allianz SE

Pacific Investment Management Company LLC (commonly called PIMCO) is an investment firm headquartered in Newport Beach, California, and it is one of the largest active global fixed income investment managers in the world.

As of 2012, PIMCO had $2 trillion in assets under management and PIMCO itself is said to be the world’s largest bond investor on its own account. PIMCO is led by the co-founder William H. Gross who serves as Co-Chief Investment Officer with Mohamed A. El-Erian, the other Co-CIO and the firm’s CEO.

Mr. Gross also manages the Total Return Fund, the world’s largest mutual fund with assets of about $285 billion today; the fund is down about (1%) so far this year, but tends to produce 5% to 6% in most years of recent memory, and the return was +5% in 2008, +13% in 2009, and a respectable +10% last year, all in the debt market. No equities.

PIMCO was founded in 1971 with $12 million in assets and was acquired by Allianz SE in 2000 with $260 billion under management for about $3.3 billion and other payments amounting to another $700 million.

In effect, Allianz acquired $65 of assets under management (AUM) for each $1 of the purchase price which is four or five times better than the current rate of about $1 for every $10 to $20 acquired under “Wealth Management” and possibly indicative of the expense of acquiring more money to run.

Allianz has never traded at more than $16 and has also in the last decade issued (or sold) about 25% of its stock out of treasury. It last became eligible for the Perpetual Bond™ at $12 last year and is currently trading at $16. Our estimate of the downside risk due to volatility is minus ($2) so that it could be trading between $14 and $18 in the next quarter without surprise, although we should wonder who will pay for the insured disasters of this year.

The dividend rate is currently 2.8% and it expects to pay out $2 billion in dividends, once per year, around the mid-year, and the current stock trades ex-dividend which was paid in May so there’s not much incentive for us to do anything but hold the stock at $15 to $16 and set the stop/loss at $14 to $15.

Exhibit 2: (B)(N) AZSEY Allianz SE (ADS) – Risk Price Chart

(B)(N) AZSEY Allianz SE ADS

(B)(N) AZSEY Allianz SE ADS

Allianz SE provides a range of insurance and financial products through its subsidiaries. It operates and manages its activities through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management.

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

From the Company: Allianz SE primarily provides property and casualty, and life/health insurance products to private and corporate customers worldwide. Its Property-Casualty Insurance segment offers various insurance products, including motor liability and own damage, accident, general liability, fire and property, legal expense, credit, and travel insurance products. The company’’s Life/Health Insurance segment provides a range of life and health insurance products on individual and group basis comprising annuities, endowment and term insurance, and unit-linked and investment-oriented products, as well as private and supplemental health and long-term care insurance products. Its Asset Management segment provides institutional and retail asset management products and services to third-party investors, including equity and fixed income funds, as well as alternative products. This segment offers its products to retail and institutional clients. Allianz SE also offers various banking products for corporate and retail clients; and provides alternative investment management services in the private equity, real estate, renewable energy, and infrastructure sectors. The company was founded in 1890, has 145,000 employees, and is headquartered in Munich, Germany.

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 2006) 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.


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”
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 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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