Is Today's Global Economic Crisis Worse Than the Great Depression?

The "liberal elite media" has been comparing today's global economic crisis to the Great Depression for some time now. Many feel that the economic conditions during the Great Depression were far more depressing than today's crisis, citing peak unemployment rates of 24.9% in 1933 according to the Bureau of Labor Statistics.

I would be interested in comparing numbers to numbers as percentages are actually a bit subjective. 24.9% of 2x could end up being less than 6.5% of 4x. Our total workforce today is much, much larger than it was in 1933. According to Wikipedia, there were about 24.8 million people employed in 1933, whilst we have a workforce of approximately 155 million today.

From a quick calculation, about 8.22 million people were effectively unemployed in 1933.

According to the latest report from the Bureau of Labor Statistics, there are now 10.1 million people who are unemployed today.

Is today's global financial crisis starting to outpace the Great Depression?

I sincerely hope not.

Bondholders Unite: Trust Indenture Act of 1939

Through my recent experiences with junk bond trading, I've started to realise there can be a whole lot of fine print associated with bonds. It is definitely becoming more complex than I'd intended. My broker does not offer a very advanced bond trading platform, so I've had to scour the Internet for whatever's publicly available on bond issues I might be interested in.

I sometimes find this information on the SEC Web site, but more often than not, a search on the specific CUSIP of the particular issue will show you which hedge funds or mutual funds are bondholders.

I urge anyone who is interested in junk bond trading to do further research to find out what are the terms and conditions associated with the indenture. Probably the best way to do this is to contact the bond issuer and request a copy of all the indenture terms as well as find out who the Indenture Trustee is.

Many of this fine print will preclude certain aspects of the Trust Indenture Act of 1939. I do believe that all this fine print is a bit like a back door exit, which then enables the bond issuer to take at times unfair and coercive action against minority bondholders in debt restructuring initiatives that do not take into consideration the best interests of all bondholders.

I have noticed that with certain debt restructuring initiatives, such as the Metaldyne bond tender offer, a certain percentage of bondholders is required to agree to the bond tender offer terms in order for it to go through. Technically a bondholder is a creditor to the bond issuer. What right does one bondholder have to vote on the rights of another bondholder? What right does one bondholder have to effectively say to another bondholder: Well I lent this company $1000, but I'm willing to accept $270.018 to cash out these bonds and so should you!'? But this is exactly what is happening with these bond tender offers. These bond issuers are setting us up to accept less than what we are owed.

Suppose we are both bondholders of Metaldyne. If I agree to Metaldyne's bond tender offer and vote accordingly, my vote actually indirectly affects the terms of the bonds that you hold if you do not agree with the bond tender offer. Now is this fair? Bondholders are not shareholders. We are simply separate creditors to the same company. We have no further relationship. It should remain like that. This means if I would like to do something as stupid as cashing out my bonds at 72.982% below par, I should be the only one to live with such a mistake.

My goal with this post is to get minority bondholders to unite and become self-activists - which means basically to look after your own best interests when purchasing a bond. Under the current economic conditions, it is my philosophy to treat even all investment grade bonds as junk bonds regardless of their ratings - especially since we have imperfect information transparency here.

For anyone wishing to do more about reforming regulation related to debt restructuring initiatives, please post a comment to get in touch.

Mind you, there's still time to refuse the Metaldyne bond tender offer at this time. If you are one of the few bondholders bold enough to do this, please feel free to post a comment to get in touch.

Will Resilience Be Rewarded In the Markets?

The dramatic decline of certain stock prices is deeply incredulous to me.

Sometimes, I sit staring at the screen just awed by the intensity and extent of the value erosion. It really makes me wish I had more capital as to me, so many stocks are undervalued at the moment. At the same time, I am having to sit on my hands to keep myself from trading because I know there's a great potential for further declines however unreasonable and irrational I feel these declines may be. The markets just have to work through all the deleveraging and nothing but time can achieve this.

I only trade for about three hours a day, but lately, I've been starting to wonder how people who are obligated to sit through an entire session can look at it and not be affected emotionally or psychologically.

It takes resilience to be trading when the markets are in such a traumatic downtrend.

Will this resilience be rewarded over the longer term? And to paraphrase my boss, is there a longer term?

Today, the market's selling off on fears of the debate over whether or not to save the auto industry.

Whilst the impact of a hypothetical bankruptcy or a hypothetical series of bankruptcies related to the auto industry will be much less extensive than the Lehman and Wamu bankruptcies were to the financial markets, I think the Republicans are overlooking the potential ripple effect that further job losses will have on the US economy. If we do not stem job losses, homes will continue to be foreclosed and assets will continue to depreciate across the board. Speculation about future write-downs related to credit card and student loan defaults has already been offered up as the next crisis-within-a-crisis by the perpetual pessimists. However, it is unfortunately realistic speculation. How much of that speculation is already priced in? And if it isn't already priced in, will we, with our battered-up portfolios, be able to withstand one more battle?

Now these are all depressing thoughts, but we need to stop the bleeding whilst our economy still stands a good chance of being salvaged.

And the only way this could be achieved is for the US government to step up and really calm the markets - however unpopular the notion to rescue the auto makers is.

As I finish this post, I'd like to pose the question: Is it better to now keep our 2 cents and think a penny saved is a penny earned?

Now if everyone thought this, our economy would definitely be beyond salvaging.

Money Management: The Most Critical Success Factor

The more I think about it, the more I realise that money management strategy is the most critical success factor in trading.

If you're forward testing already, you will have a good idea of what your win probability is.

It's important to do a calculation to see what your ideal stop should be set to so that your profits will end up exceeding your losses.

For example, if you expect to earn 50 pips on 60% of the trades with a 20 trade run, you can expect to gain $600 from these trades. However, you will be stopped out 40% of the time. If you set your stop to 40 pips, you will end up with $280 net profits. However, if your stop is set to 75 pips, you will have no net profits. And if your stop exceeds 75 pips, you will have a net loss.

Happy trading!

Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.

ForexDiva's Back-Testing, Forward-Testing & Technical Insights

Technical analysis has added a new level of understanding to my trading.

However, my frustration with many introductory books and webinars is that the chart examples shown are always picture-perfect examples indicating what the author/presenter would have done given the information we now know about the subsequent price movement. Of course the chart would make a lot of sense at that point. However, never discount the fact that in live trading, pattern formations or price breakouts do not always develop in such a straight-forward manner.

When I first started technical analysis, I was given the advice to do a lot of back-testing on charts. I spent copious amounts of time back-testing - looking for rectangles, triangles, uptrends, downtrends, and Elliott Waves. To these charts, I added MACD, RSI, Stochastics, Fibonacci, and moving averages. I even spent time analysing price movements of certain currency pairs immediately following a news announcement. Whilst back-testing provides good practice on spotting chart patterns, it is also important to forward-test.

In real-time trading, with so many emotions at play and prices bouncing back and forth as if they're on a trampoline, future price movement is not always going to end up looking like the charts that you've back-tested.

This is why I started a trading journal to keep track of my real-time trades. My trading journal helps me to not only look at past price action, but focus on how I feel price will move in the near future. I always take a screenshot of the chart on a trade I'm about to do and jot down notes on why I'm doing the trade, as well as the entry, limit, and stop levels. After the trade is over, I do a trade review and write down any new trading insights gained from the trade.

Lately, I have started integrating different technical approaches for different markets.

The more I trade forex, the more I realise that the previous five or six candles are actually the most important ones to base your trade on. These candles provide an indication of current trader sentiment. In a highly volatile market like forex, current trader sentiment matters more than anything else. How traders are positioning themselves in the short term is usually reflected on these five or six candles. On forex trades, I like to use these candles as indicators of where I should put my stop. I try my best to look for trades where I can place stops of less than 30 pips, although this is not always feasible. By doing this, I am able to capitalise on quick momentum moves. If momentum stalls, the loss is much easier to recover.

When I first started trading, I always felt that using such a small stop ends up working against you. However, now that I've have some market experience, I realise that this is part of being a selective and discerning trader. There are definitely trade setups that enable you to trade on a 30 pip stop. Do not be afraid of using a small stop because keeping your stops tight will enable you to survive in this market. Do be cautious if you're trading on a variable spread platform, though. If the spreads are wide, you need to be very, very cautious.

On equities, I prefer to look at fundamentals such as P/E ratio, EPS, book value per share, and dividend yield. I basically use the Warren Buffett/Carl Icahn method, which stipulates that if a stock is below its book value, then it's safe to buy - although I also own stocks that have negative EPS. These were purchased before I really started studying investment strategies in great detail. In this type of market, it would be smarter to buy the bonds of companies with negative EPS if they have a good asset base rather than hold their stocks. With a bond, at least you have a stronger claim on the underlying assets of the company.

Lately, I have also started adding technical analysis to my 'active cash' stock trading. Active cash is the part of my portfolio that I try to actively trade by implementing profit-taking with marginal ROI, which enables me to grow this cash yet keep some liquidity. In 2006, I made a good double digit return by implementing this strategy. However, in 2007, the cash became inactive due to unrealised losses. I had to consider these positions as part of my longer term portfolio at that point.

Nonetheless, I have been trading my active cash strategy once again as I've discovered a key success factor to this strategy. Timing is critical if you're implementing a strategy that is similar to active cash, which is what many hedge fund managers are using.

To get timing more accurate, I like to look at the short-term DJIA chart first. If there are indications of DJIA momentum picking up, I know that it's potentially a good time to buy. If DJIA indications are bearish, I stay out of the market.

Looking at the DJIA chart is so important during this time. The buy low and sell high mentality is not prevailing at the moment. People will be looking to take smaller short term profits in favour of keeping liquidity. Hedge funds and mutual funds need to build up their capital levels again and I suspect that taking smaller short term profits day in and day out is how they're doing it. Once the Troubled Asset Relief Program bailout starts working through the system and more capital flows through the market again, we can possibly expect profit-taking to be more measured and dignified.

Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.

Job 25% Done: Post-Election Ponderings

Everyone seems so energised that Obama won the US Presidential Election and subsequently made his 'Yes, we can' victory speech. It didn't resonate so much with me, although I did cry - probably more because I've become so cynical of politicians than because I feel this one is actually going to change America.

Being a glass-half-empty kind of person, I'm thinking the job is only 25% done at best. He still needs to prove himself in the White House and shake off the impression that he's a socialist, which doesn't score very high points in my dictionary or most Americans' dictionaries. I'm still waiting for Obama to appoint Hillary as Secretary of State or to oust Treasury Secretary Paulson (regardless, Paulson's ousted himself).

Most of all, I'm hoping that the Republicans in Congress will be able to prevent Obama and the Democrats from raising taxes as he's planned.

This campaign has made me realise how ridiculous the US progressive tax system is. There are people who fit into lower income tax brackets that can actually have a higher net income after taxes than a person in a higher tax bracket. Meanwhile, people with lower incomes are 'entitled' to a whole array of government benefits. The 10% tax credit for homeowners that Obama has proposed is just boiling my blood. It has increasingly become clear to me that today's financial crisis in large part is a repercussion of lenient government policies established during the Great Depression.

The US government does not tax all of its citizens equally. Someone who is supposedly making a lot of money according to the US government ends up paying almost double the amount in taxes than a person who makes a very small amount of money. We are penalised for wanting to make more money and the US tax policy as it stands actually equalises net income. If you don't believe this, check out the following analysis I did, which shows the net income after federal tax deductions for some income levels in the higher income brackets to be less than net income after federal tax deductions for some income levels in the lower income brackets.

If John McCain said one thing right - it's that these are tough times, let's not raise taxes on anybody.

And if Obama's going to cut taxes, everyone should get a tax break. He's clearly favouring people in lower income tax brackets at the expense of the people in the higher income tax brackets. And this is really, really unfair.The Republicans have recently become like the short-sellers. Everyone wants to pick on them. However, as unpopular as the Republicans are, they are necessary in our political arena because they provide an order of checks and balances.

Are Bond Issuers Taking Investors for A Ride?

A number of companies have clearly been taking advantage of the current liquidity crisis. But are they going so far as to be considered taking their investors for a ride?

These are mainly the companies that made extremely good use of the previous economic boom by issuing junk bonds like crazy.

If my theory is correct, these same companies are now using the global financial crisis as an excuse to push their own corporate bond prices even lower so that they can repurchase the bonds from jittery investors at below par value.

What do they have to gain? Junk bonds typically have very high interest rates. Plus, the issue price is sometimes below face value, which makes the yield on these bonds even more attractive to investors. However, for the company issuing the bonds, they could turn out to be a very expensive mistake.

With the economic downturn, assets are being broadly deleveraged, driving prices down quickly and drastically. Junk bonds are no exception. If the issuer can repurchase these junk bonds on the secondary market at a fraction of their original cost, then this translates to substantial cost savings in interest payments. Moreover, they have the option to then sell these bonds out onto the market once the economy recovers.

Amongst the guilty companies:

1. Metaldyne, which launched a bond tender attempting to buy out senior bondholders at $0.27018 on the dollar
2. E*Trade, which is issuing 25 million shares of common stock in an effort to retire $450 million worth of subordinated notes
3. ION Media Networks, which has been deferring the interest payments on their 2013 senior subordinated series A notes (CUSIP 46205AAB9) for about a century. This bond issue actually dropped down to $0.06 on the dollar recently.

If only the bond market had a Carl Icahn…

The Fair Weather Friends on Capitol Hill

The Fair Weather Friends On Capitol Hill

Public sentiment has clearly turned against Wall Street during the painful escalation of the global financial crisis. As government officials across the world pointed fingers at the “Wall Street Fat Cat Predatory Lenders” who were purportedly the cause of this unprecedented financial system meltdown that is threatening to give the Great Depression a run for its money (no pun intended), the golden-parachuting CEOs on Wall Street that collect million dollar paintings and own more houses than John McCain have been under increasing scrutiny.

However, why have we failed to scrutinise the Fair Weather Friends on Capitol Hill and across the globe when they were the first ones to encourage subprime lending and the first ones to run the other direction as things showed imminent signs of collapse? Why have we failed to place at least some of the blame on the ones who actually took out those subprime mortgages and are now opting for bankruptcies that further undermine our entire economy?

When Lehman Brothers and WaMu were on the brink of bankruptcy, why did the US government single these two institutions out to fail when every other failing and flailing company was ‘rescued’? The US government needed a scapegoat and unfortunately, Lehman and WaMu became those scapegoats. There is no doubt in my mind that the bankruptcies of these two companies could have been avoided. However, the Federal Reserve and the US Treasury were amongst the first to panic by failing to provide additional liquidity to the markets. If the Federal Reserve had increased Lehman and WaMu’s liquidity levels, then Lehman and WaMu would not have opted for bankruptcy. People across the world wouldn’t be blaming the US for dragging them through mud.

But most importantly, if the ones who had actually taken out subprime mortgages had made on-time payments in the first place, then we wouldn’t even be in the middle of this crisis now. This article from the International Herald Tribune gives a good overview of the root cause of the subprime housing crisis. The government officials and lobbyists that were fuelling the subprime housing bubble benefitted financially from the whole ordeal as well. They should step up to the plate and own their responsibility in the catastrophe.

For the past few years, we have been building our economy on a shaky foundation. We have been fighting a multi-trillion dollar war that we should not have gotten into in the first place. We have neglected to invest in our infrastructure and are falling behind in the global economy. The US government is becoming increasingly corrupt and increasingly socialist. Almost every law that is passed entails pork barrel politics. The most appalling example: the $700 billion TARP bailout plan that couldn’t be enacted without serving up an array of bacon and ham on the side.

We are labelling people on Wall Street ‘Fat Cat Predatory Lenders’ and lauding the equally irresponsible people who took out subprime mortgages – the ones who are now opting for bankruptcy just because their property isn’t worth as much as it used to be – as ‘victims of greed.’ Meanwhile, the government that ignited this fire is ‘rescuing’ Wall Street. Where is the justice in this?

It’s time for our government to step up to responsibility or forever be known as the Fair Weather Friends On Capitol Hill.

And some of the ways they can do this:

1. Invest in our country’s future. We have become so caught up with policing the world that we are neglecting our own country. We need to pump money into improving our infrastructure, and this includes education, roadwork, and alternative energy. And with particular regard to education, we should definitely include compulsory financial management courses as part of the core curriculum in our schools. Investing in the education of our children is the only way to bridge the growing income gap in America.
2. Politicians have been arguing about healthcare for such a long time. The focus of the debate has been on insurance companies and the increasing premiums that people need to pay. I think the real problem is the cost of healthcare itself and not necessarily the insurance companies. If we nationalise the burden of healthcare, I am positive that the US government will go into further deficit. Therefore, the solution must come from the private sector.
3. Pay off the national debt. Unfortunately, debt has become a way of life for many Americans, myself included. However, it is time we clean up the slate the old-fashioned way – with dignity, with hard work, and with time.
4. Get rid of social security. Every individual should be taking their own financial responsibility. We have opted to live in a society where individual liberty is the most important value and the foundation stone of our community. Why do we even foster a socialist notion like social security? The American people have entrusted their future to the US government, but based on the way that things are moving, I am quite certain that the US government may have to do away with social security in the near future and I am in favour of getting rid of social security sooner rather than later. Just imagine. We are paying so much in social security taxes today. If the US government comes back to us thirty years from now just as we are reaching retirement age and says that they will no longer be able to pay us social security, we would have been ripped off big time. I would rather they refund our social security taxes and allow us to save for retirement on our own. Social security isn’t even inflation adjusted.
5. Deregulation has been labelled as one of the key reasons for the global credit crunch. However, if we are to leave regulation to the Fair Weather Friends on Capitol Hill, just how will things be different? Do we really think that our government is equipped to handle the challenges of the 21st century when they have already failed us so much by leaving us a multi-trillion dollar deficit? They will just create even more catastrophe if we give them the power to regulate the markets some more. Moreover, deregulation was not the cause of the problem. Government meddling was. All of today’s problems could be traced back to the Great Depression, when the US government first started meddling with the free market. Fannie Mae, Freddie Mac, and the social security system are all vestiges of the Great Depression. They are all elements that are weighing our economy down today.


Let’s establish a new long term vision for the US – one that will not leave the next generation bankrupt; one that will create new opportunities for people who never had any – not by handing out money, but by encouraging them to take responsibility and action for their own future.

ForexDiva's List of Investing Books You Should Never Own

There are so many good books on investing and forex trading. I am not going to recommend any. Do your homework and research some titles in your spare time.

I now must own about 20 or 30 books on investing and I would like to point out the few that are so useless that they should never have even been published. One should never, ever buy these books if it could be avoided.

1. Brian McAboy's The Subtle Trap of Trading: Why So Many Smart People Don't Make Money Trading, And How To Get On The Right Track In Less Than Two Hours. Yes, this ForexDiva actually bought this terrible book and regretted it terribly ever since. Basically, this is a book that makes unhelpful generalizations about trading without providing any meaningful detail on improving your trading skills. It is used by the author as a marketing platform that tries to sell the reader even more useless stuff. If you're smart, avoid this subtle trap by all means.
2. Beat the Odds in Forex Trading: How to Identify and Profit from High Percentage Market Patterns by I. R. Toshchakov. This book is not very well written, with lots of grammatical errors. Therefore, it was immensely difficult to finish reading it (and therefore I didn't). Moreover, the information contained in it could easily be found in other books or available for free on other online blogs. I am, however, going to attempt reading it one of these days for the third time to see if any of the material resonates. And if it does, I'll be posting it here.
3. Currency Trading for Dummies by Mark Galant and Brian Dolan. You know I find Brian Dolan to be one of the cutest guys on Wall Street, but I just think he could have done a better job with this one. And usually, the stuff that Brian Dolan publishes is high quality content that is right on the mark. This book's gotten some pretty good reviews, but again, most of the information could be found for free on the Internet, so I was very disappointed.

ForexDiva's Favorite Trading Cliches

My forex broker has been telling me trading cliches for the past year and all along, I've been thinking that they were trading cliches.

However, I recently realized that he's been right all along.

So just in time for the holiday season, here are some of ForexDiva's favorite trading cliches to cheer you up whilst you trade:

1. Always use a stop. The great thing about stops is that you could move them to lock in a few pips of profit while you're trying to catch the trend train. The art of trailing stops is definitely worthy of investigation.
2. Ensure that every trade you make has a good risk to reward ratio. Being selective about the trades you take ensures that you're making good use of your time.
3. Look at longer term charts and then drill down to a slightly shorter term chart from there. If you're wondering how to do this, I've heard from a few different sources that you could use either an 8:1 ratio, a 10:1 ratio, or even a 12:1 ratio to determine which charts to pair together. As an example of the 8:1 ratio, you would look at a 15-minute and 120-minute chart together.
4. The trend is your friend. Remember to stay with the trend.
5. Pay attention to the support and resistance levels. What once was support could become resistance and vice versa. I've been noticing that support and resistance have been working like magic lately. For instance, as of 13 November 2008, DJIA has been trading at an approximate range between 8000 and 9600. Once it hits 9600, it doesn't go much higher than that. When you think of it, it makes total sense. There is still a lack of capital in the markets due to the liquidity crisis. Even if hedge fund managers wanted to be bullish, it's not technically possible at this moment in time.
6. Remember to have trading discipline - meaning, keep the fear and greed in check - and perhaps most importantly, not moving your stop further away when a trade is against you.

Happy trading!

Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.

Bearish Divergence: One of My Favourite Forex Trade Setups

This is one of my favourite forex trade setups.

You need to look for a trend and pay attention to the MACD histogram indicator.

If the trend is up and the MACD histogram is getting weaker, then bearish divergence is forming. If the trend is down and the MACD histogram is getting stronger, then bullish divergence is forming.

These are both signs of potential market exhaustion.

Once this occurs and you receive a candle confirmation that the trend is turning, you can make a trade in the opposite direction. Your stop would be placed beyond the most recent market extreme. In this case, it would be beyond the most recent market top.

This trade setup works about 75-85% of the time and usually, the profit potential is anywhere from 300-500 pips. Good luck!

Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.

How I Blew Up My Forex Account

I suppose the story of how I blew up my forex trading account is nothing unique. In fact, it's quite similar to all the news that's been coming out of Wall Street for the past year or so: people holding onto leveraged losing positions until the losses move so far against you that there's basically no way back.

My forex trading account is a mini account and my forex broker extends 200:1 leverage to me. In return for this leverage, they have the right to liquidate my positions should my account fall below the minimum margin requirements. The consensus seems to be that retail forex brokerages take the opposite side of their clients' trades. This means that if you go long EUR/USD for one mini-lot, they are short EUR/USD for that same mini-lot. So, your profit is their loss and vice versa.

During my first month of trading, I literally grew my account by about 600%. Most of the trades I did were on GBP/USD and I was totally trading on the right side of the trend. Had I stayed in that one trade, I could have made a good five digit gain (as in $26,000) on that one trade as GBP/USD soared past 2.11. However, I took an early profit and entered other positions.

This amount of gain is only possible because the lot size I was trading was enormous.

And in hindsight, this was what killed my account. Because I was trading such large lot sizes, when it was my turn to get into a bad trade, the losses quickly piled up. This, and I was too stubborn to get out of the trade.

Had I stopped when I was up 600% and taken the time to really learn the ins and outs of forex trading at that time, I would not have blown up my account. However, in blowing up my account, I learned a very important lesson about trading.

And this is rather than only looking at the gains, we need to ask ourselves what are the risks? And how can we limit those risks?

I am now in my first full year of trading forex. I've been speaking to other traders, attending the webinars provided by my broker, and reading up on books and blogs.

While I have not been able to recover my account yet, I recently had a moment of clarity. And this is that I haven't been letting myself take enough profit. The trend is your friend, right?

Let the trend be your friend once in a while.

Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.

Luxury Will Never Be the Same

Just as the Lehman and WaMu bankruptcies changed the landscape of Wall Street, the global financial crisis has spurred discussions about how the luxury goods industry will never be the same again.

As an avid supporter of all things luxurious, this really makes me sad.

All of a sudden, it's tacky to be seen with anything but something from three seasons ago.

It's really unfair and all this talk about cost-cutting has got me depressed.

Gone are the days when I visited Wall Street just so I could buy the Tiffany & Co. Wall Street Charm. (I could only afford the silver one, but together with all my other Tiffany charms and the charm bracelet, would now be seen as an ostentatious overture). Gone are the days of writing to Bulgari's Investor Relations Department to ascertain a rumour that shareholders are eligible for exclusive prices - albeit a self-initiated rumour. And gone are the days of dreaming about procuring both an Hermes Birkin and a Kelly. I suppose deep down inside, I always kind of knew that by the time I was able to purchase a Birkin or a Kelly, they would probably no longer be fashionable. But there would always be an endless choice of It bags - or so it seemed.

Let's not take the trend of recycling to the extreme. What is money for but to spend?

Cutest Guys On Wall Street

This is entirely off-topic and I am mainly posting this to break the monotony.

I did realize that these gentlemen are all forex traders. It's not that I wanted to be biased, but from my observations, the guys who trade stocks and bonds are generally not all that cute. Can you seriously expect me to place Jim Cramer or Tim Sykes on this list?

1. Brian Dolan
2. Boris Schlossberg
3. Todd Gordon
4. Dave Leaver
5. Jamie Saettele
6. Antonio Sousa

Metaldyne's Ultimatum to Bondholders: Accept $0.27018 On the Dollar or Reorganization On Our Terms

After a very expensive 2007, during which I saw the value of my entire stock portfolio decline by over 30% and my forex account basically self destruct, I decided to get into bonds at the start of 2008. Bonds seem easy enough to trade and corporate bond yields have been temptingly competitive with equities. They seemed like such a good buy and every forex diva likes a good bargain.

So in late August 2008, I purchased Metaldyne’s senior bonds (CUSIP 591160AD8) at a major discount. If this position worked out, I would gain over 79% annually because the bonds were trading at such a huge discount. Plus, there would be a constant stream of interest income that I would be able to go on minor shopping sprees with.

I was so proud of myself really and occasionally giving myself a pat on the back just thinking about this deal.

However, when Metaldyne recently issued an ultimatum that basically told their senior bondholders to either accept $0.27018 on the dollar or a prepackaged reorganization, I finally understood why junk bonds are called junk bonds. To add insult to injury, they even cancelled their latest interest payment.

To accept or not accept this ridiculous tender offer? That is the question.

Well, one could actually play this announcement a few ways.


Option 1: Purchase Metaldyne Senior Bonds On the Secondary Market If the Price is Below What Is Being Offered by Metaldyne

One would then gain the price differential when the Metaldyne tender offer goes through. While this may seem like a good play, the risk is that not every bondholder will accept the tender offer (95% of each bondholder group – both senior and subordinated – would be required for the tender offer to go through).

Moreover, I should think that Metaldyne would be looking to buy out any remaining bonds on the secondary market if they could purchase the bonds for less than the $0.27018 on offer.


Option 2: Sell Your Bonds on the Secondary Market

Remember one needs to pay a $30 processing fee to accept the tender, so if you bought your bonds at a good price and the commission on your bond trade is less than $30, it may be a good idea for you to sell on the secondary market. However, will you find any buyers?


Option 3: Refuse the Offer

If I were to accept the offer, I would be losing about 12% on the deal, including transaction fees. This isn’t too bad.

However, the idea of Metaldyne giving bondholders an ultimatum has me very suspicious indeed. Do not march in here and give bondholders an ultimatum for failing to properly manage your business. If you’re going to give an ultimatum, make it a fair one.

While every bankruptcy is different, $0.27018 is below the norm expected of bondholder recoveries in bankruptcy filings. Remember that WorldCom and Enron bondholders were able to recover above what is being offered by Metaldyne. And Metaldyne has quite an asset base.

Based on a conservative estimate of Metaldyne’s most recently published balance sheet, it is my opinion that senior bondholders should expect no less than $0.66 on the dollar based on Metaldyne’s recent balance sheet. Senior bondholders should be taking a more aggressive stance and protecting their own interests in this tender offer.


Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.

About ForexDiva

I’m a 30 year old woman who most people would agree would fit in better at a shopping mall than competing with the smart guys on Wall Street.

Shopping is one of my main passions - not that I'm a bimbo. OK, maybe semi-bimbo.

This is one of the key reasons I trade. It fulfils my love of buying and getting a bargain in return.

I started trading equities in July 2006. In May 2007, I started trading forex. And in April 2008, I started investing in corporate bonds. Surprisingly, my most successful positions so far have been in corporate bonds. I don't quite like that they're so illiquid, but do find very good opportunities every once in a while. It's been my saving grace, really, considering that it contributed the most gains to my 2008 bottom line with the least amount of risk.

It's the beginning of 2010 and my stock portfolio is still down in the double digits like a lot of other people, but I've got a few positions that are showing a significantly high double digit recovery, such as the heroic HWD. I blew up my forex account in a few short months in 2007, but have started making lots of progress in technical analysis because of this. I attribute this to my forex broker (who probably needs a restraining order against me) and a few good books that I read on forex trading, including books by Grace Cheng and Ed Ponsi.

I’ve allocated my stock portfolio in such a way that a small part of it comprises what I call ‘active cash.’ This means that I’ll very actively trade equities with this cash, allowing me to keep both long and short term positions whilst realizing some profits.

I know I've got lofty financial and lifestyle goals, but I am not discouraged by the fact that my largest trading account is only 5 figures at the moment. Laugh all you want because I'll be the one laughing all the way to the bank!

Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.