“Cash in With Crisis Bonds” Safe Haven Investor

by Travis Johnson, Stock Gumshoe | February 3, 2009 10:46 am

Many of you have forwarded copies of the latest ad from Justice Litle for the Safe Haven Investor[1] newsletter from Taipan[2] — 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[3] coins[4] 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[5].

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[6], 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[7] in America.

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

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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[8] 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[9].

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[10]. 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[11].

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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