“Cash in With Crisis Bonds” Safe Haven Investor

By Travis Johnson, Stock Gumshoe, February 3, 2009

Many of you have forwarded copies of the latest ad from Justice Litle for the Safe Haven Investor newsletter from Taipan — all the newsletters with these kinds of names are pretty active these days … Safe Haven, Safe Money, I think it’s time I start up a “Safe Gumshoe Report” to tell you exactly how to build a proper underground vault for your gold coins and collectible Beanie Babies.

But that’s a project for another day. Today, we’ve got a nice little teaser that tells us we could be making “safe” money while the world burns if we buy Crisis Bonds.

What is a crisis bond?

I’m so glad you asked! Let’s investigate this one together, shall we?

Justice calls it the “Safest Investment in America Today.” No tiptoeing around there, eh?

Here’s the promise:

“Urgent Market Alert: Wall Street Pushed to the Brink: New “Crisis Bonds” Auctioned at Fraction of Full Value.

“Reply today and receive your first guaranteed monthly payout by February 28!”

So we get some kind of dividend or coupon from these “crisis bonds,” there’s a place to start.

But there’s more …

“I call these special investments “Crisis Bonds” and they’re specifically tailored to investors looking to both protect their assets AND build their wealth during these tough times.”

And later, he gives a bit more of an outline of what he means by “crisis bonds” …

“In today’s market they offer you everything you could want for your portfolio:

“They’re unaffected by volatile shifts in share prices…

“They provide you with a recurring high percentage payout, just like clockwork…

“They actually allow you to flip them into an even bigger profit in the long term…

“And thanks to the ongoing chaos on Wall Street, some are currently priced at around 50% off their normal price levels!”

And, like so many other successful letters, this one actually starts with a story …

“In 1970, a young Greek-American immigrant named John, fresh off a tour of duty in Vietnam, came home to launch his business career and plowed every penny he had into a very special kind of investment.

“That investment eventually helped him amass a $1.7 billion fortune and transformed him into one of today’s most respected industry players.

“In 1990, Kenneth, a recent college graduate, using the same special kind of investment, laid the foundation for what would eventually become one of the most successful hedge funds in America.

“In 2008 his fund was valued as high as $18 billion.”

We get some other quotes from the financial press, as we so often do, because those quotes lend gravitas to the argument and make it seem like it’s not a scam (not that it is a scam, in this case it happens to be a perfectly reasonable and real investment … more on that in a moment).

“in an interview with Forbes magazine, John said:

‘This is the most undervalued I’ve ever seen the [Crisis Bond] market. It’s unbelievable.'”

and …

“‘[Crisis Bonds] are a hybrid investment that have produced some decidedly decent returns.’ – USA Today”

and …

“‘Companies like HSBC Investments and F&C Investments are listing [Crisis Bonds] among their current favorite assets.’ – The New York Times (International)”

OK, well that’s probably enough dinking around with that first part of this teaser ad (don’t worry, there’s a bit more, too, including a specific investment that they think you should buy today). So let’s spill the beans on this part …

That Greek immigrant “John” is John Calamos, founder of the Calamos Investments advisory firm.

And the young “Kenneth” is Kenneth Griffin, who started the famous hedge fund Citadel.

What do those two famous investors have in common? They both got their start investing in convertible bonds.

Yes, “crisis bonds” are just convertible bonds. If you’re not familiar with the basics of this class of security, they are bonds that are issued with a coupon yield, just like any other corporate bond, but they also have a conversion “kicker” — there are all kinds of different ways that they can be structured, but it might be that the debt is convertible to common equity after a certain date and at a fixed conversion rate, for example.

So you might have started with a $1,000 bond that had a coupon rate of 5% (coupon yields are lower for convertibles, as a rule, than for otherwise equivalent non-convertible bonds). After five years the bond became convertible to 50 shares of common stock, so if the stock is at $10 you’re stuck with your plain ‘ol bond that still pays a quarterly coupon; but if the stock had a nice run and was now priced at $30 your bond would now be worth at least $1,500 since you could convert it into stock with that current value.

So that’s why people often describe them as a place to “hide” — you get income, and in case you’re afraid of missing the next bull market, you do get some participation if the underlying stocks take off. Of course, with the decimation that we’ve seen in the market now many convertible bonds have very pie-in-the-sky conversion rates that require 100% moves in the underlying stock in order for you to make it worth converting your bonds, but as long as the company remains solvent they should keep paying your interest.

Interestingly enough, and for this I give them some credit, the folks at Safe Haven Investor are NOT recommending individual convertibles here. It’s very difficult for small investors to build diversified portfolios of convertible bonds, in part because it’s hard to build corporate bond portfolios, period, and in part because convertibles can be quite complex — you need to understand the creditworthiness of the company and the value of the debt portion, including how the convertible is priced relative to other corporate debt and where it stands in the hierarchy in case of a bankruptcy; but you also need to have a good handle on the equity side and make a judgement as to the likelihood of the stock climbing enough to make a conversion at all likely (or worthwhile).

As one reminder of that (though I don’t think they intended it thus), the most impressive “Crisis Bond” yield they tease in the ad is for Smurfit Stone Container … a company that, since the pulled the data, has gone into Chapter 11. The bond still might be profitable, I have no idea, but it does significantly complicate the analysis.

So they recommend a “pool” of convertible bonds. Here’s the tease for that specific pool:

“The King of Crisis Bonds Does All the Work for You…

“The Crisis Bond market can be a bit difficult to navigate.

“That’s why it makes perfect sense for us to let one of the most experienced and successful Crisis Bond investors do it for us.

“I can’t reveal too much about him here (although I will in your FREE report), but this brilliant businessman has built a billion-dollar fortune over the course of four decades using Crisis Bonds.

“And now he’s making it easier than ever before for you to follow in his footsteps.

“This billionaire Crisis Bond vet has assembled a collection of some of the best Bonds on the market that you can now purchase with one click of your mouse or call to your broker.

“That’s it. No calling around to different dealers… searching the Web for hours trying to find a way to purchase… just a simple call or click is all that’s needed.

“And you can follow this basket of Bonds just as easily as a regular stock. It even has a ticker symbol that you can look up on all the major finance sites.

“This group of Crisis Bonds currently pays out an annual yield of about 11.4% with its first guaranteed monthly payout in your hands no later than February 28!”

Well whaddya know — the “king of crisis bonds,” though I don’t know how often he’s actually saddled with that moniker, is … John Calamos himself.

And this teaser is for one of the closed end funds he manages, the Calamos Convertible & High Income Fund (CHY)

The fund is priced just under $9 as I type this, and it does have a yield as teased of a bit over 11%. And I don’t know if you can say anything has a “normal” price right now, but over the first four years of this fund’s five-year history it did fairly consistenly trade in the mid-teens, so I guess you can argue that it’s on sale for “half off.” Of course, most of the rest of the market is, too.

If you’d like to see that Forbes article about Calamos and the bargains he’s seeing, by the way, you can click here for that. Or if you’re interested in exactly which convertibles John and Nick Calamos like now they provide portfolio updates and their market commentary on their website.

I do have some money invested with a regular mutual fund that invests in convertibles, and to be honest I’ve thought about some of these closed end funds in recent weeks too — these types of investments tend to get a lot of attention when the market is wild, especially if they happen to be trading at a real discount. CHY is not currently trading at a discount to net asset value, as most closed end funds generally do, it’s actually at about a 5% premium. So apparently there are enough yahoos like me “thinking about” buying beaten up debt funds that not all of them are so beaten up anymore.

Does this Calamos fund make sense for you? Well, that’s certainly a choice that only you can make. I’d be a lot more comfortable with a fund than with buying individual convertibles, and it’s certainly true that Calamos is one of the most respected names in this sector, so there’s at least something to start with. If you like to play in this sandbox, let us know what you think of convertibles, or corporate debt, or John Calamos, or … well, whatever comes to mind.

Happy Investing!

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18 Comments on "“Cash in With Crisis Bonds” Safe Haven Investor"

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Dusty
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Dusty
February 3, 2009 12:15 pm
CHY is one of the Oxford Club (an Agora unit) picks in the “Perpetual Income Portfolio.” I have some money in this stock and it is a part of the group that is the main reason for my 50% “Unrealized Profit & LOSS.” My personal take is that if this Fund survives the Depression and eventually returns to about where it would have been anyway, then fine. My concerns are that the Depression is going to last until the mid twenty-teens and there is a lot of chance for too much to go wrong. Wrong with the Fund which has… Read more »
Daniel Victor
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Daniel Victor
February 3, 2009 1:01 pm

The problem with closed end funds is that,in the event of a panic,they could go to a big discount.I’d prefer an open-ended fund that maintains a healthy cash balance,in case it has net redemptions.

Mike Clee
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0
February 3, 2009 2:21 pm

Do you have any idea what GregMcCoach is promoting for gold stock that rises $2 for every $1 rise in the price of gold?

Marciello
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Marciello
February 3, 2009 2:32 pm

Convertibles always move closely relative to high-yield debt. They just offer a bit more reward if everything works out. Calamos have focused on convertibles for decades. Here’s a good breakdown of their analysis and convertibles:

http://www.q1publishing.com/index.php?&content_id=143

Thanks for everything gumshoe

Elissa Stein
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Elissa Stein
February 3, 2009 4:14 pm

Travis- Aren’t all those Calamos funds front-end loaded? Don’t they have high fees that impact the returns dramatically? How does that work? Are those fees included in the results of the income distribution?Thanks. Good write-up.

tt tan
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tt tan
February 4, 2009 7:50 am

Sorry, I am not in about funds, bonds and others because I do not know anything how they are traded. So I do keep them out but I do read your columns to educate myself.The article on Crisis Bonds
is an eye opener for me. Thanks gumshoe.

tt

ic
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0
ic
February 17, 2009 1:46 am

Annual Expense Ratios
As of 10/31/2008
CHY Common Shares
Management Fees 1.91%
Other Expenses 2.35%

Total 4.26%

http://www.etfconnect.com/select/fundpages/other.asp?MFID=111123

A little steep, no?

ic
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0
ic
February 17, 2009 3:00 am

http://www.closed-endfunds.com/FundSelector/FundDetail.fs?ID=88195

Income Only Yield 7.77%
Distribution Yield (Market) 15.05%

1/2 of their distribution is return of capital
So you are paying them 4% to return to you your own money?

JIM
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JIM
February 21, 2009 2:34 pm

WHICH CRISIS BONDS ARE THE BEST TO PURCHASE AND OFFER THE MOST PROFIT ??

ron
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ron
April 26, 2009 8:20 am

Anybody knows about after market trading?

Chris G
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0
February 3, 2009 2:41 pm

That’s the ADVANTAGE of closed ends – the discount! By the way, if I were 50% underwater in a fund and collecting divs, I would consider selling it and buying a fund from a different company to claim the tax loss now (at least to offset my ‘big’ dividends).

Gay Soderstrom
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Gay Soderstrom
February 3, 2009 3:26 pm

I expect that is DGP, an ETF, double long gold, it goes up double because of leverage, it also goes down double

Cool Soupy
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Cool Soupy
February 3, 2009 4:30 pm

Don’t forget that these “double” ETF’s are per day. Each day they start at”0″ and either go up or down. Several articles have been written on these ETF’s where the market was up significantly and yet the funds were even or down.

SageNot
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SageNot
February 3, 2009 9:01 pm

Closed end funds trade as listed stocks, mostly at discounts or premiums Elissa.

Travis has it right, CHY is trading at a slight premium, & is trending up after a sharp Nov., ’08 bottom.

http://finance.yahoo.com/q/ta?s=CHY

I know Justice Litle from his time at OI as their chief editor, Converts were never in the OI as I remember, so if I may state, this is not the Justice I knew, he’s more of resource (commodity related) expert.

JMHO folks!

Gravity Switch
Admin
11
February 3, 2009 9:20 pm

I think we’re all right!

It doesn’t have a front-end load as I assume probably some of their mutual funds do, but it does have an awfully huge expense ratio, sorry not to have mentioned that. Looks like the combined expense ratio is over 4% of assets, which I imagine is hard to pull off if you’re not the “king.”

Jan Upton
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Jan Upton
February 4, 2009 12:03 pm

I thought I saw that CHY had a dividend of about 10% right now down from 16% before the market plummeted. Even if your expenses are 4% aren’t you making 6% regardless of what the market is doing? That is if the dividend holds of course. Since the stock is down 50% from it’s high it looks like they’ve already adjusted the dividend. Am I missing something?

Gravity Switch
Admin
11
February 4, 2009 12:19 pm
The dividend is not directly related to the expense ratio in that way. If I understand it fully, the expenses are applied to the net asset value of the fund on an annual basis and taken out of any returns, before the dividends are paid or before other year-end distributions are made or gains reported, if any. The dividends that are announced by the fund are the actual dividends that are paid, so in this case the current yield is something like 11% in real dividends to shareholders. Of course, if the expenses were lower the dividend could potentially be… Read more »
Patrick
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Patrick
March 2, 2009 1:33 pm

Do you still hold your position in CHY? I still hold 3500 shares and have been surprised at how low this thing is sinking. I am wondering if it has anything to do with Obama’s new tax rules on carried interest. I would appreciate your thoughts.

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