Check out this post on Wal-Mart.

You bought at $40plus but the MOST valuation from your DCF spreadsheet is around $30.

What made you buy Walmart?

Also, if someone has only a time horizon of 10yrs, but the projection is 20yrs in future, wouldn’t it be impossible to have any MOS as 10yrs DCF is definitely less than 20yrs DCF.

The first thing that you have to understand about the corporate bond market is that it is enormous compared to the stock market. It is much, much bigger. The second thing that you have to understand is that unlike the stock market, the bond market is not an exchange based market. It is an over-the-counter market between buyer and broker where the ability to track pricing information is very fuzzy. There is no big board where you can see the last trade. There is a service called Trace that supposedly tries to act as a gathering point for historical transaction data. Unfortunately, there is considerable leeway for brokers in providing transaction data to this service. It’s slow and can be very slow depending what other peoples motivation is.

The third thing is that there is inconsistent liquidity among issues based on size of the issue (smaller size of issue is less liquid), on-the-run vs. off-the-run (on-the-run is more liquid), total issuance of the issuer (small issuer is less liquid), issuing history of the issuer (how often do they issue, less often sometimes less liquid, more often sometimes less liquid), coupon size (lower coupon equals lower price which tends to be more liquid then really high coupon bonds), and finally are the brokers terrified to do a trade without massive bid-offer spreads due to volatility (see recent times).

Fourth, retail buyers of corporate bonds (versus say institutional buyers) generally get jobbed on pricing and transaction fees. Unlike, the stock market where competition among brokers especially the rise of online brokers has just crushed transaction fees for all, the bond market is still mostly dominated by the big brokerage houses. Thus with control of the market, transaction fees can be extremely high for bonds. The primary driver of profits for large brokers since the deregulation of stock commisions in the 1970s has been fixed income trading. This was especially true during the yield bubble that has just puked all over itself creating the credit crisis as we know it.

In a normal market (not this one), the typical bid-offer spread for an institutional buyer of a corporate bond is 5 basis points (bp) of yield. That’s 5 one-hundreths of a percent. It would be much higher for a retail buyer. This by the way is for corporate bonds of any maturity. The longer the maturity of the bond, the higher dollar amount you are actually giving up in the 5bp spread.

Now, regarding bond pricing information, I am not aware of any easy to access place on the internet where a person can look at Trace data. Institutions normally have Bloomberg access which provided Trace data. Plus, institutional bond managers get daily pricing runs and transaction ideas from the brokers either through Bloomberg email or other electronic service. Incomplete access to market pricing information however should probably not deter retail bond buyers. If you are buying the bonds to hold to maturity or at least for a significant time, as long as you’re happy with a given bond’s risk-return profile killing yourself to get the best price is probably not worth your time. What’s more important is getting a general idea of the bond pricing landscape and understanding the fundamentals of the company whose debt you are buying.

When I talk about the bond pricing landscape, I mean getting an idea of pricing using some benchmarks. I like to have a general idea of what each credit ratings category is going for. Pricing by the way is generally in yield terms and discussed in yield spread to underlying treasuries of similar maturities. This is the credit spread. To figure find the bond’s yield and subtract the appropriate treasury. I like to have an idea of what generic AA, A, or BBB bond pricing is. This gives me something to work off of when considering individual company bonds of similar ratings. There should be places to find this information on the web. If I have a generice idea of pricing then I can start working from there to determine some relative value for the bond I’m looking at. After I determine relative value then I can ask myself if that’s a good absolute value using my risk/reward judgement.

Finally, buying a bond is similar to buying a stock. A bond is just further up the corporate capital structure and gets paid before common shareholders in a liquidation or reorganization. They are both claims on the assets of the company. Before you can buy either though you must have an idea of what those assets are worth and that comes back to the fundamental business analysis that Joe and this community spend a lot of time talking about.

Fundamentally, the price of a bond is the product of the probability of default and the recovery rate. The recovery rate is what your claim is worth after a bankruptcy event be that liquidation or reorganization. The recovery rate is the result of the value of the company’s assets less any claims above you in the capital structure with common equity being at the bottom of the structure. It’s important when buying a bond to know where you are in the capital structure and who’s senior to you.

The probabiliyt of default is determined by a company’s liquidity. Can they pay their bills? If not, they may be declared in default (different kinds of default) and may have to file for bankruptcy protection (classic it depends situation). In predicting a probability of default you must have some idea of the volatility of a company’s cash flows in the future including the risks to those cash flows versue the cash outflows including the risks of increasing cash outflows (see AIG’s situation as reference). You also need to have some idea of a company’s ability to obtain further financing to stave off default or sell assets to raise capital.

There are lot less books on fixed income investing in the market than those telling you about stocks. Some good places to start though besides Graham are: Bill Gross’s book (PIMCO founder); a classic “Inside The Yield Book” by Homer and Leibowitz; and Marty Whitman’s books on value investing. Whitman got his start by investing in distressed securities and workouts. His basic premise on equity investing is that you should first look at a company like a good credit analyst would.

I almost forgot one important point. Usually, corporate bonds like U.S. treasuries have a face value (par value) of $1000. Bond prices are quoted as percentages of this par value. So, a bond quoted with a $93.00 price has an actual cost of $930. Online brokerage commisions for bonds varies, but I think tends to be about $1 per bond with a minimum of $10. So, your $93 price is actually $94 or $940 for one bond ($930 $10 min.). That will squash your yield a bit. The high investment costs also make buying bonds a little bit constraing for small dollar accounts. My suggestion would be to break up your bond holdings by maturity and company. If you can buy 5 bonds, try to buy the bonds of 5 companies (1 bond per company) with staggered maturities to diversify your credit exposure and interest rate risk.

See this WIKI page, and look at how many of the “largest change %” days are in 2008!

http://en.wikipedia.org/w…

Cheers

This week has been the BEST week so far to grab on bargains damn…

Might wanna take a look at CNI at 35$

Might wanna take a look at NKE at 43$

Might wanna take a look at MHP at 19

Might wanna take a look at JNJ at 55$

Damn so much to look for ! This is just the ones that I’ve throughly analyzed and felt most confident

Purchased NKE, myself.