Thursday, July 9, 2009

I'm Officially Junk Bond Queen

Sad but true...

The majority of my corporate bonds are now trading flat with the exception of Neiman Marcus and United States Steel - taking me one step forward as a viable candidate in the 2009 Most Disastrous Portfolio Contest.

Not to be outdone, I also missed out on a 700 pip move with a recent GBP/JPY short by getting out with just 10 pips. My strategy was to move my stop after getting to +20 pips, but it never got there whilst I was in the trade and started reversing, so I just took profit. In hindsight, I had managed my risk properly, especially considering the reversal would have taken out my stop, but at the same time, it doesn't make you feel any better seeing the 700 pip drop practically overnight.

Realistically speaking, if I'm going to continue moving my stops the way I do, this is going to continue happening. So, I'll just have to look at it as risk management, especially since if I don't move my stops, the trade could have turned into a loss instead. Even a small gain is better than a loss, I say. What I do need to now figure out is why my trading signals didn't show me that the 700 pip drop was imminent so that next time I see a similar signal, I'll be able to stay in the trade longer.

Back to my Junk Bond Queen status though, I've acquired most of my newly defunct bonds for less than 40 cents on the dollar, so the damage is relatively contained. However, the bankruptcy proceedings will take at least another year for most of these companies (Washington Mutual Bank, Lehman Brothers, Ion Media, and Metaldyne). I did acquire the WaMu and Lehman ones after they filed for bankruptcy at a ridiculously low price, but Ion Media and Metaldyne were sort of unexpected but not exactly shocking.

I don't expect Neiman Marcus or United States Steel to follow suit.

A few scenarios could play out following a bankruptcy:

1. Bondholders could receive a direct payout following the formal bankruptcy and liquidation proceedings. The widely accepted average recovery is about 30 cents on the dollar for unsecured creditors. The procedure could take a few years, so patience is required.
2. Bondholders could receive equity in the newly restructured company in the form of preferred or common stock. In this case, it is my belief that bondholders could be in for quite a substantial gain providing that the company is good to begin with. In hindsight, I should have bought myself some GM bonds immediately following its Chapter 11 announcement, but it's now too late.
3. Bondholders could receive new bonds issued by the newly restructured company. This, I'd say is the least favourable outcome. It's not unusual for a company that has filed for bankruptcy to repeat history.

The important thing to remember after a company files for bankruptcy is to file a proof of claim form as soon as possible.

In celebration of my JBQ status, I contradicted myself and bought some more replica art, including
Max Klinger's incredibly beautiful Triton & Nereid as well as Gustav Klimt's Completion and The Kiss.

I've now got replica art everywhere.

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