Steve McDonald made some friends in the world of Gumshoe a few years ago, when his income-focused advisory The Bond Trader was doing pretty well.
He moved on from that to a service with a similar strategy for the Oxford Club folks called Oxford Bond Advantage, and he’s now pitching that newsletter by tantalizing readers with the idea that you can get “Payroll Certificates” that are “obligated by law” to pay you.
So that sounds pretty good, right? Let’s dig into the details a bit. He sums it up pretty nicely in the intro to the ad:
“If you’re concerned about retirement, forget relying on Social Security… stocks… real estate… banks… or annuities. These specific companies are obligated by law to pay you at least$56,744 once you enroll.
“Hi everybody, I’m Steve McDonald and I hope you’re sitting down…
“Because what you’re about to see will change the way you look at money forever.
“It’s one of the only money sources in the world where it’s mandated by LAW that you get paid.
“For lack of a better name, I call them ‘Payroll Certificates.'”
That’s probably enough for many of you to hazard a guess as to what he’s talking about, but don’t spoil the surprise — we don’t want everyone to hear the idea and get bored and wander off… (OK, here’s a hint — it rhymes with “shmorporate fronds”).
And the “Payroll” bit is because he describes it as kind of like being on the payroll of a company, without doing any work…
“You won’t lift a finger for them, and yet… they’ll still pay you just as if you did work for them!
“Best of all, it has nothing to do with the employee payroll. Employees can get their wages slashed at any time… but our payouts are set in stone!
“Collecting money from a ‘Payroll Certificate’ takes only a few minutes a week at most.”
And he throws in a couple examples, using the old copywriter’s trick of talking about what you get, but not what you have to invest in order to get that return…
“Some companies, like Genworth Financial, pay up to $5,618 to holders of ‘Payroll Certificates’… Others, like Dell, pay as much as $2,257.
“Even $6,236 from a company like Barrick Gold….
“There are dozens of companies that offer these opportunities.
“Getting started with just eight companies can net you $56,744.”
McDonald is appealing to the risk averse for the most part, and he makes that clear:
“Take It From Me – This Is the Only Way to Stop Worrying About Your Money
“Whether we’ve met before at a conference… or you know me through my weekly videos… or even if this is the first time you’ve seen my face…
“There’s one thing we both have in common:
Are you getting our free Daily Update
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just click here...“We absolutely HATE losing money!”
And he throws in some examples of people who are much smarter than you or I, and who are cutting their risk exposure… though he doesn’t exactly say that they’re buying “payroll certificates.”
- “Famous bull investor Jeremy Siegel of the Wharton School is predicting our ‘first correction’ in 2015.
- Credit Suisse, one of the world’s largest banks since 1856, is predicting a 2015 correction.
- Warren Buffett has drastically sold off his shares in Kraft, Intel, and Johnson & Johnson.
- Billionaire John Paulson, the man who foresaw the subprime mortgage crisis, says he’s selling off his U.S. stocks.
- George Soros has dumped millions of shares of JPMorgan Chase, Citigroup and Goldman Sachs as of late January.
- Jim Rogers expects a correction, adding, ‘that’s the way the markets have always worked.’
- Bill Gross, the legendary PIMCO guru, claims ‘The good times are over’ and expects assets to fall this year.”
All of that’s probably true, though it doesn’t necessarily mean anything particularly specific for us as individual investors. Bill Gross is a bond guru, George Soros has certainly bought lots of stuff just like he sells lots of stuff, Warren Buffett has sold some major holdings but also poured lots more into others, including IBM, John Paulson hasn’t had a particularly good year since 2009 if my memory is correct… the list goes on.
Does it mean anything other than “many folks are nervous that the bull market will eventually end, and it’s been going on longer than average?” No, not really. Lots of folks are hedging their bets after five+ years without any big corrections (and the S&P 500 has doubled in five years, meaning stocks did well better than average for that time period — and some sectors are even more ebullient, with the Nasdaq up 150% and biotech up about 300% in those years, plenty of reason for folks to be itchy about taking profits or hedging).
More from McDonald…
“These things I call Payroll Certificates are one of the few ways you can invest confidently – knowing with 100% certainty exactly how much you are set to collect in cash payments each year and month.
“It’s one of the only investments that can hand you upward of $56,744 in income, no matter what’s happening in the stock market! …
“There is NO limit to how many of these checks you can receive.
“You can take baby steps with just one company and collect around $4,740 to $9,806.
“You can start modestly, as I recommend, with eight companies and collect $38,721.
“Or you can really get aggressive and sign on with 12 or 13 companies and clear $91,000.”
So again, nothing in there about what kind of investment would be required to “take baby steps” or “start modestly” … If you have ten million dollars to invest, I can get you a risk-free $91,000 every year, easy as pie (that’s a return of less than one percent, for those who don’t want to do math), but for the smaller investors among us (including me) collecting $38,721 sound pretty awesome… assuming that we can do it with our much-more-modest investable cash.
Then he gives an example that finally mentions how much we have to invest…
“Collect up to $6,236 From Barrick Gold
“Last year, my followers collected a Payroll Certificate for this exact company.
“When I first showed it to them, it promised that, if you invested $13,837, you would receive guaranteed cash payments totaling $5,074 – made in 13 separate payouts over time.
“After you receive those 13 deposits, you get your original $13,837 back.
“Plus, an extra predetermined bonus of $1,162.
“In total, then, you put in $13,837. And you get back $20,073.”
So that’s pretty good… and yes, we’re well past hinting and word evasion now, there’s little point in keeping the “secret” any longer: Steve McDonald, in this teaser pitch for his Oxford Bond Advantage, is pitching — don’t be too shocked now — investing in individual corporate bonds.
Which does indeed give you a predictable cash flow, because bond coupon payments (the amount they have to pay to bondholders, usually in two payments each year) are set when the bond is created, and because you know that (assuming the company doesn’t go bankrupt) you will get back the original principal of the bond from the borrowing company at maturity. And these bonds are legal agreements, so yes, you are guaranteed by law to get the coupon payments… unless that gets legally changed, as through some kind of (usually bankruptcy-related) change to the bond agreement.
The reason he doesn’t use the word “bonds” is both because it’s a hard sale to make — many bond-focused newsletters have gone under because it’s not a very sexy or marketable idea, lending money to corporations, and there weren’t that many such services to begin with — and because just about every single pundit on the face of the earth is expecting interest rates to climb, which should make bonds a weak investment, possibly a disastrous one.
That’s a broad perspective, though — even if interest rates rise and the value of many bonds falls, not all of them will fall precipitously, and corporate bonds are not just a pure play on interest rates and currencies the way sovereign bonds (like US Treasuries) typically are, they’re also a play on corporate profits and the ability of a company to pay back its lenders. Companies whose fiscal standing improves considerably could see their bonds become more valuable even in a rising interest-rate environment, because their perceived credit rating improves, though that’s not the norm… and, of course, the fact that “everyone” expects a rising rate environment well into the future doesn’t mean it will come to pass. Everyone expected rates to rise considerably in 2007, too, and in 2011, and in 2013. The bull market in bonds has been far, far longer and more consistent than the bull market in equities.
McDonald is pitching corporate bonds for the most part, and the examples he gives are fairly lowly-rated bonds — because that’s where the sexy stuff comes in, if you can buy $1,000 in principal value (that’s how most bonds trade among individual investors, in lots of $1,000 or $10,000 of principal) for $800, and the bond is paying a coupon of $60/year (meaning it had an original yield of 6% on the $1,000), then your $800 is actually earning you a 7.5% yield because you bought at a discount to principal… and, perhaps more importantly, you get the principal back in the end. So in ten or 20 years (or however long it is until the bond matures), you get $1,000 back from the company as the principal of the loan is repaid. That’s a 25% “at maturity” bonus (your $800 back plus another $200 to repay the full principal amount — the company doesn’t get to repay you at a discount even if that’s how the market values the bonds).
That’s just an example with easy numbers, McDonald provides a couple other examples of “Payroll Certificates” that are currently available:
“With DynCorp, you put in $13,935 and you get back $18,675.
“With Jones Group, you put in $10,320 and you get back $19,170.
“With Comstock, you put in $9,945 and you get back $19,751.
“Now, it’s important to note, you don’t have to invest $9,000 or $10,000 in these.“You can get in for as little as $600 or so.”
I checked the bonds currently outstanding/trading for those companies (I use the bond market data center at FINRA for this, most brokerage websites are pretty bad at showing bond data). Here’s what I found at current prices:
DynCorp’s major outstanding bond has the CUSIP 26817CAB7 (a CUSIP number is what you use to identify a particular bond — like a ticker for stocks, it’s what you would use to research the bond or, in most places, place orders with a broker). It is rated as Junk (CCC+ from S&P), which means the ratings agency considers it to be “Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.” Given the current yield environment, you really have to go down to these low-rated bonds to get a chance at a substantial yield or real capital gains.
That particular bond matures in 2017, so you have about two years until it is repaid at $1000. It bottomed out at about $800 late last year, but last traded around $920. So that’s a 8.5% “kicker” when you’re repaid, and it pays a coupon of $103.75/year so the current income yield is about 11%. There are probably five payments remaining, so the total return, including all the coupon payments and the return of principal in July of 2017 would be about $1,520, or a profit of $600 in 2-1/2 years.
Why is the return so high on something that’s “contractually obligated” to pay you a high yield? Because Dyncorp is a highly levered company in a somewhat unpredictable industry (defense and aviation, for the most part), and investors are demanding a high yield because of what they must perceive as an above-average likelihood that the company will default on its debts and go into bankruptcy. I just browsed their recent presentation to a leveraged finance conference, and they say the industry continues to be uncertain, they’re doing (and saying) the right things about paying down their debt balances, but this particular bond represents a large portion of their debt, well over half of the debt, and it’s due to be repaid in July of 2017. Depending on what the environment is like for refinancing debt when that runs around, they may start to feel the pressure of that impending maturity over the next year or so.
So the calculus for these kinds of investments involves understanding the company’s operating prospects and the likelihood that they’ll keep generating enough cash to pay the coupon until maturity, having some consideration for how easy or difficult it might be for them to refinance at maturity (ie, issue new bonds so they can repay their existing bondholders — most of the time at least some of the debt, if not all, is effectively “rolled over” to new lenders), and, perhaps most importantly for junk bonds, making some risk assessment that you’re comfortable with about how likely the company is to go bankrupt before maturity and whether they own assets that are valuable enough to repay bondholders if they liquidate.
And sometimes, companies that still seem like they can be viable operators after the debt is cleared get a decent deal in bankruptcy court and the bondholders essentially just end up owning a company that continues operating, but which is far less valuable than the bonds had been (just ask anyone who owned A&P bonds a few years ago, for example — $1,000 in bond “face value” might have seemed appealing to buy at $600, but after the company went through bankruptcy that bond was turned into equity that’s probably now worth far less than $100 (probably more like $3, but I haven’t checked — that equity also might not be publicly traded, it isn’t for A&P now, which adds further to the difficulty of selling).
So that’s the downside risk, and corporate bonds — particularly junk bonds — are often quite illiquid, so you can’t count on being able to sell your bond at a good price if you think things are deteriorating. Diversification is at least as important for corporate bonds as it is for stocks, partly because of that lack of liquidity and the general lack of coverage of corporate debt in the financial press (at least, the financial press that’s focused on individual investors). I don’t want to overstate the default risk of corporate bonds — even for junk bonds, most of them are repaid and don’t default… but if you buy just a couple bonds as an individual investor dabbling in debt, one of them going south will clobber that portion of your portfolio. Bonds are far less likely than stocks to fall abruptly in value, and even less likely to not repay the principal at maturity, but that doesn’t mean it’s impossible… particularly if you’re dabbling in the riskiest part of the bond market, these high-yield bonds that look so appealing with a discount to maturity value and a double-digit coupon yield.
If you’re curious, I didn’t look into all the details of the other ones, but the “Comstock” one is almost certainly Comstock Resources, which is an oil company whose 2019 bonds (CUSIP 205768AJ3) are now trading down to 60 cents on the dollar with an effective 23%+ annual yield to maturity. There are a lot of small energy stocks who’ve been downgraded to “Junk” status and are trading at huge yields, largely because they’re levered companies that depend on the sale of oil to make their coupon payments and, well, we’ve all seen what oil did over the last six months or so. If oil recovers sharply, perhaps many of them will be fine… but if it doesn’t, the pundits are widely predicting a big wave of bankruptcies among the smaller oil stocks. Comstock has about a billion dollars in debt and a market cap now of only about $250 million, so it’s getting closer to being effectively “owned” by the bondholders already.
McDonald undoubtedly thinks the risk is overstated, at least for the “Payroll Certificates” he recommends — here’s how he puts it:
“Remember, the only major risk to your money is if the company offering the Payroll Certificate goes completely bankrupt.
“But I’ve NEVER had one of these companies default and refuse to pay out. Not once. Not ever.”
From the general gist of the ad, it appears that McDonald is recommending a lot of bonds that are not investment grade, meaning they’re down below “medium credit quality” with a rating of BBB or worse (that’s what folks call “junk bonds” — which doesn’t mean they’re necessarily bad investments, just riskier than “blue chip” or steadier, less-levered companies who can borrow much more cheaply, and whose bonds therefore yield much less). And he’s focusing on those with maturities coming fairly soon, to reduce both credit risk and interest rate risk (when a bond matures you are repaid the principal), so it looks like he’s restricting his recommendations to maturities that are perhaps five years out or less.
And he does leave us with one hint about a “buy now” bond that he likes (the letter implies that he likes or has recommended several other examples, but this is the only one he doesn’t name), so let’s see if we can wrap it up by identifying that for you. Here’s what he throws out by way of clues:
“In fact, I recommend you collect a quick $1,522 from this aluminum company right now.
“This $1,522 Is Waiting for You
“First of all, this company is in outstanding financial shape.
“Profits are up 232% year over year.
“It’s recently made Nasdaq’s ‘hot performers’ list.
“And with my guidance, you can easily collect $1,542 from this company.
“It’s easy…
“To initially get started, you’ll need just $1,021.
“You’ll then collect $522, split into 10 separate payments.
“When the payouts are done, you’ll get your full $1,021 back.
“In total, then, you put in $1,021. And you get back $1,522.
“That’s a predetermined return of 54%.”
He doesn’t specifically say that this “quick” return will be over five years, but I’m assuming he’s talking about a bond with about five years left to maturity (10 payments, most bonds pay twice a year), so that means the yield is in the neighborhood of 10% a year (it could be a much lower-yielding bond that pays once a year and has a coupon of about 5%, but that seems unlikely).
Alcoa (AA), the biggest and strongest aluminum company in the US, is rated down at the bottom of investment grade/top of “junk” grade, and their yield going out to 2018 is less than 3%, so we know it’s not them. There other other aluminum-related companies that also have debt maturities in the 2019-2021 timeframe, including Park Ohio (PKOH) and Kaiser Aluminum (KALU), but most of them have yields far, far lower than 10%… and some are junkier, like the bonds of Exco Resources (XCO), and trade at a big discount to principal that doesn’t match the clues.
Aleris comes fairly close (2020 maturity, 269279AE5) and trades right around principal but has a yield of just about 8%, so that’s too light. Century Aluminum (CENX) is probably the best match among fairly major companies, but doesn’t match exactly, either. The best match for yield is probably Noranda Aluminum’s 2019 11% bond (CUSIP 65543AAD6, stock’s ticker is NOR), though that doesn’t match the earnings growth hint… that Noranda bond was trading at a bit over $1020 six months ago, so perhaps the copywriters are using some pretty stale recommendations in generating their teaser hype (wouldn’t be the first time).
So… no definitive answers for you, but some thoughts to chew on — my best guess for what he’s touting now for the aluminum bond is that Noranda debt, which should have nine or ten coupons remaining at an 11% yield and is trading right at the principal value.
The possible outcomes are that the bond goes up in value because NOR’s finances improve (most of the aluminum stocks are getting crushed right now after the sector got downgraded by Merrill Lynch, bringing down NOR as well as CENX and AA), which would let you sell at a profit or hold and keep getting the 11% coupon; the bond goes down in value because of weak finances or outlook for the industry (which is what happened, gradually, over the last six months) but still stays strong enough to pay the coupons and repay your principal in 2019; or the company goes bankrupt and the value of the bond becomes much less certain (if they have to actually liquidate, or convert bonds into equity of a refinanced company, etc.), something which doesn’t usually happen rapidly or unexpectedly but certainly can surprise investors and make it hard to take a small loss on the way down to prevent larger losses.
Because of the high yield and the junk status of the bond, this is not primarily an interest rate play — it’s much more dependent on the perceived risk of default (roughly described by the credit rating) than it is on the competitive rates of “safe” 5-10 year bonds. If the 10-year note benchmark goes from 2% to 3.5% over the next few years, that’s not likely to impact a high-yielding security like this very dramatically (it should impact investment grade corporate debt, which is priced much closer to US treasury rates, much more substantially). That means you’re investing in company fundamentals to a greater degree than you are investing in interest rate expectations or inflation prospects, so knowing the company well and diversifying will be key for those who want to own high-yield corporate bonds, whether or not you wish to call them “Payroll Certificates.”
Interested? I’ve found myself tempted by corporate bonds from time to time, but I am not terribly confident in my strengths as a credit analyst and I haven’t built a corporate bond portfolio — my inclination is to avoid most fixed income assets right now just because rates are so low, but that doesn’t mean investing in junk bonds can’t work just fine for a lot of people, particularly those who need more income from their portfolio, even if it’s not necessarily sexy or fast-moving enough to sell a lot of newsletters. Let us know what you think with a comment below.
Thank you for this explanation of that come on!!!! I am getting increasingly angry
reading those LOUD COME ONS. After I read this, I bothered my local friends re:
payroll certificates – no one knew. My answer to that whole piece is “stop!”
I am on the same page as Ms. Malone. It seems that the investment advisory industry should take a long, hard look at self regulation, such as that performed by attorneys and CPAs, with the goal of cleaning up its soiled reputation. OK, OK, enough about attorneys. Can you imagine what they would be like without self regulation ? In 36 months, I have formed a fairly low opinion of the implied ethical behavior of investment advisors as a whole, and now we have people calling for legislation that will compel financial advisors to put the customers considerations ahead of their own. Is it the ability to lie with a straight face and/or flush clients down the drain that makes us proud of “free enterprise” ? I am beginning to believe that democracy and free enterprise will always be destroyed by the worst characteristics of the Human race. I am not going to get into a religious debate of the nature of what is actually referred to as “intelligent design”, but I keep seeing this image of He, She, or Them looking down upon us and solemnly shaking His/Her/Their heads saying, “What a f…ing mistake this experiment turned out to be.”
Occasionally someone will conclude their very justifiable rant with the complaint, “Nothing can change it.” I disagree. An asteroid, like the one that hit the Yucatán Peninsula 65 million years ago, will solve all of our problems, including the worst characteristics of the Human race.
I also agree with Ms. Malone. These “come-ons” border on fraud, and at the least they waste one’s valuable time reading through all the hype and baloney. Bonds are a very specialized type of investment, and this come-on could do many less knowledgeable investors grave damage to their portfolios when some of these speculative issuers go bankrupt or Ch 11 reorganization. I seem to recall that happening fairly often when we have a prolonged turndown in the markets; hope that’s not coming up soon, but I’m not holding my breath.
I feel so stupid as a new invester. The ONLY reason I didn’t get sucked into the “payroll certificates” is because McDonald wanted $1100 to subscribe to his bond advantage service and I didn’t have that to spend for advice. I am so glad I searched and ran across this info! If only I knew where someone as close to retirement as I could get good, reliable info for someone with little to invest. Playing catch-up is not fun.
An October 1st article from Stansberry Investment Advisory
Service, 2015, explained the high risks of holding bonds at their
present time/ levels. I seem to recall that the name of Porter
Stansberry was indicated (not certain about that last detail).
MB
He is a loudmouth jerk beware!!!
Mike- Look at the Downtown Investment Advisory on Seeking Alpha. Salo Eizenberg is straight up, usually advises bonds only 4-6 years out, creates a bond ladder so that you are always rolling over maturing bonds at new rates,. Seems to be pretty conservative.
Stay away from this service. McDonald claims a 2% rate of bonds going bankrupt, but his performance since late 2013 is closer to 20%. Each and every coal bond he recommended went under, and his service rode them all the way down to zero value.
Many of his other commodity bonds, (oil and steel companies), have bit the dust also.
The remainder of my $2,000,000 portfolio in these bonds is now selling 30 to 50%
Below recommended purchase price, and are vulnerable.
McDonald has ceased answering investors emails, and NEVER does a mea culpa for the millions of dollars lost by his subscribers, which 5 to 9 percent returns on the remaining bonds will NEVER make up.
I have $750,000 bonds at 50k each now in bankruptcy. This covers my IRA AND a brokerage account. It appears that McDonald did not read the available press, or do any decent research, since 2013, when the market began to be flooded with junk that had little or no hope of surviving intact. Go to the FINRA site, check the high yield bonds rated BB or better, and have at it. Do NOT follow McDonald’s poorly researched recommendations!
I agree with ferd321. I started with Steve McDonald when he was at Bond Trader, and I did fine. I didn’t make a killing with his recommendations but I didn’t lose anything either. He told you when to get out if he thought the tides were turning and I liked that.
I followed him to the Oxford Bond Advantage and what a mistake that was. I thought that he would tell us when to get out just as he did when he was with the Bond Trader. For over a year all he was pitching were coal and energy bonds, even telling us to buy more of a particular company as in the case of Peabody, all the while extolling how solid a company Peabody was. He was completely silent as each coal company he recommended has gone into default.
In his weekly videos instead of a mea culpa he tells his subscribers that they are at fault for being a rate pig, not diversifying enough and buying more than one bond in each company. Really , we should only own 1 bond of $1000.00 in each company?
As a word of caution steer way clear of anything Steve McDonald recommends!
I must have missed the after the fact one bond each recommendation,
But in all other respects I second Zelda’s experience. What is most maddening is that McDonald offsets huge non deductible capital losses with taxable interest income and
Concludes:”see, your losses aren’t as bad as you thought.” In addition, while the market
Continued to implode aroun his faulty recommendations, he has changed his buying
Advice parameters at least five times since 2013 in an attempt yo cover his poor performance. Then, as Zelda attests, he blames his subscribers, all fully invested in the
Bankrupt companies he touted, with rate pig-it is or failure to follow his most recent
“Guidelines”. What a joke. I doubt the existence of ANY research department at the
Oxford Bond Advantage.
The claim that McDonald has never had one of his bonds go bankrupt is just plain untrue as of May, 2016. At least five or six of his recommended company debt are now in bankruptcy. To pour salt in the wounds, the financial press uniformity relates that investors in each and every one of these bankrupt companies has little chance of recovery in the bankruptcy workouts.
•Billionaire John Paulson, the man who foresaw the subprime mortgage crisis, says he’s selling off his U.S. stocks. Read the article written by Richard Teitelbaum issued 11-29-2011 in Bloomberg Bus Mag. HOW PAULSONGAVE HEDGE FUNDS MGRS’ ADVANCE WORD ON FANNIE MAE RESCUE. It’s alleged John Paulson ( not related to Sec Paulson) made more $$$ in 2008 than before or since 2008 and on inside info apparently. Hell; every Mgr, Senator and Congressman dratsabs knew to sell all their stocks and to heavily Short The Market. No one called, emailed nor texted me to sell and short. I allege that Wall St NY and Wash DC are corrupt as hell. Sec runs out and charges smaller guys (usually) with inside trading hoping I guess to give a deterrent I guess. Meanwhile I can’t prove it but I will allege that Sec Paulson Guaranteed to Warren Buffett when he Bot GS Preferred Stk that the US Gov’t would back any losses as guarantees US Taxpayers. Wall St, NY and Wash DC politicians I allege are corrupt as hell. Meanwhile SEC now and then charge smaller guys with insider trading. I think they consider it a deterrent to the paeans. Its a game, it’s rigged and very corrupt, That is one of several reasons America is now fiscally and morally bankrupt. As for bonds; Federal or Corp I do not and will not be owning until after big correction.
hell yes they’re all corrupt, money begats greed and greed is the basis for all corruption.
don’t forget that Steve Croft of 60 min had written proof and accused Nancy Pelosi of making millions on insider trading after meeting with various healthcare co’s etc.
Greenspan (again on 60 min) admitted that he knew the financial collapse was coming,
(which was a totally orchestrated event between D.C. and Wall St)
Paulsen was former CEO of Goldman Sachs (you don’t supposed they got any special treatment do ya)
What about Cheney being former CEO of Halliburton, then track who got all the 100s of billions in contracts to rebuild Iraq.
my point is they’re all corrupt and I don’t think there’s a thing we can do about it because that’s just the way it is.
Is it not good to be in a position to pass laws that benefit yourself. Our lawmakers have the best jobs in America. They do love their jobs and try to hang on for as long as possible. Insider trading is legal for them and pays very well. The rest of us would go to jail. They are not self serving jerks are they? Gosh how long do they have to be in office to draw their full salary in retirement?
Only one full term. Of course that is not long enough to stay connected to the insider deals every year. So they dangle the Vote Carrot and continue run up the Gov spending and we continue to pay the bill. Will Congress raise the debt limit now with Jack Lew’s request????
Bill Sad but true,,still US has some of the best pols. money can buy,,,,or lease..as they don”t stay bought. If you dropped a Demican/Republicrat into a barrel of corkscrews you never again could find them,,,only difference is right or left twist.
A few years ago Stansberry had a similar junk bond service run by a Mr.Williams as was touted to produce 20% a yr. They did quite well for a while, some even rose up to above par, and then hit some rough spots. Mr Williams left and another of the staff took over and changed course getting away from the junk bonds. I left also. If one can afford the risk and is lucky this can be very lucrative.
Russia Alum giant RusAl. Has seen huge profit increase with decline in rubie from 130 mil loss to 250 gain. There bonds around 9.5 . Reportedly cut there debt by a billion recently.
I caught him because it looked as if his math was wrong and he was not using interest it was as though he wanted the returned dollars to be counted as part of the payout of it is not! Junk Bonds are Junk Bonds and interest is interest. Of course that interest higher than the current Banks payments.
Profits are up 232% year over year. Is that net? Maybe stock pps? Seems vafue although initially i am thinking reported.
My day will be a happy one.. Should I become dour or depressed, I will simply remember the phrase “shmorporate fronds” for a laugh
I followed Steve McDonald’s advice and bought Arch Coal Senior Notes, 7%, 6/15/2019 for$4,707 on 5/22/13. Current value is $1,475, a loss of 69%. Hopefully Arch Coal will still be in business on 6/15/19.
Arch Coal is now in bankruptcy, all bond probably worthless. Also in Stock Gumshoe, the Norinda Aluminum bond was pumped, as it was to members of the Oxford Bond service. The company went bankrupt in less than a year after the recommendation. How is that for astute bond picking? Ugh!
The message is simple. The higher the yield, the higher the risk. It’s never not true! These guys sell to your greed, not your need.
Who teaches these guys how to do these pitches? They all seem to be the same. I listened to about 2 minutes of this one and then tuned out. I mean, come on, “payroll certificates.” The Oxford Club must do all right but I’ve not been impressed. I’ve tried a couple of their newsletters and sometimes look at their email messages. So far I’m underwhelmed.
James, I find the Oxford Club to be one of the most offensive of a bad group. A couple years ago, they ran an ad for (I think) “444 Accounts” that paid outrageous yields and all we had to do was subscribe and we would be blessed with the secret. Being a retired banker and never having heard of “444 Accounts”, I subscribed to their idiot newsletter under a money-back guarantee. Guess what ? They are not interest-bearing accounts AS IMPLIED, they are single payment jumbo life insurance contracts. That is not stretching the truth for advertising purposes – that is not having a clue about what the word “truth” actually means. Cancelled my subscription and got a refund within 24 hours
why not just use.. Div. reinvestment plan in individual stocks, isn`t there a special way of buying them??
Investment-grade corporate bonds, when you could get them, used to be a good investment for retired folks like me. I owned a few until they expired or were called. They were a comfort during the 2008-9 crash as their asking price barely moved during the whole time everything else was doing a yo-yo. However, the Fed has essentially taken these off the table with the current interest rate policy, leaving us with an ugly mix of REITs, BDCs and MLPs, as well as junk bonds such as the above mentioned Arch Coal, for yield. I was recently tempted by a too-good-to-be-true bond touted by Mr. McDonald that was selling above par. Don’t remember the name of it now, but I researched it and discovered it was callable fairly soon…a fact he failed to mention in his pitch. As it would almost certainly be called, I calculated that the investment was likely to lose money if bought then. I mentioned this to him in his reader-response section, but got no return acknowledgement, so I concluded he really wasn’t interested in helping people.
Good point about callable bonds — details about whether it’s callable and on what date should be available in the FINRA page or in your brokers bond trading system. Callable means they can buy it back at a particular price, some bonds are also put-able, meaning you can force them to buy it back from you, but that’s rare (as are convertible bonds, which offer either an automatic or forced conversion into equity at some future time.
You need to really read the stock carefully as the, “I’ve never NEVER known one not pay…” is naive nonsense. Lots haven’t paid including some “banks that can’t fail”. In Europe there were plenty too, The “Co-Op” bank was actually named by Gordon Brown (UK Prime Minister at the time) as an example of a good, solid well managed bank while others were falling like sacks of spuds so I put 300,000$ into a bond which they simply refused to pay out on. They don’t have to go Bankrupt to not pay a bond but they might not pay a bond and then MAYBE the bond holders will get together and force a bankruptcy. I sold my $300,00 bond to a hedge fund (for $160,000) that intended to buy up as much as they could and put pressure on the bank, they managed a half arsed deal which I think they worked hard for. Co-op is still trading and just contacted my daughter at University suggesting how safe they were! i was nearly sick over my breakfast as the executives of the Co-Op bank actually turned out to be some of the most stupid, untrained arrogant morons in corporate history and they didn’t even go to jail (they would have been hanged in China!)
The other thing is that many bonds are really what I describe as “optionally callable” rather than having a termination date. If it’s simply an offer to carry on at a lower (or higher) yield then that’s a pretty easy decision to make, you buy a crystal ball, ask what LIBOR rates will be on October 1st 2023 and make your decision. Look very closely at the terms. If the terms are that the institution might offer you shares in GM instead or gym coupons and a regular food parcel then you can bet they won’t call in the debt! On the other hand I’ve had bonds where the issuer has wanted to “Call In The Bonds” by simply buying them back at a little over the current price or offering a new bond or just to offer to buy back the bond with no fees. The message being the stronger the issuer the more comfortable you will sleep at night but still read the notes, if it’s effectively a Perpetual (even if it has a termination date) then you need to be really happy with the terms.
Thank You for your comment about McDonald. He should go back to the old farm, I would agree that he is not interested in helping people.
Thank you Travis for shedding a little light on this subject. I had a slight inkling that he was talking about bonds, but was not certain. Now I am. I was thinking of signing – up, but it would be a waste of money.
I joined oxford club in 2001. I am Canadian. I went to a number of their events,
and was quite shocked that although they held these seminars for canadian investors they
had less knowledge than I did about canadian stocks. I had joined because I was trying to learn from the pros. Heck, Im still not a pro myself, but I get by okay with doing my own research. I occasionally listen to a sales pitch, then research what they are saying—sure gets the blinders off. The one thing I can assure you is that when you see Oxford Club come up, turn on your SCAM light.
Changing the subject slightly, there is a closed-end “Credit Suisse High Yield Bond” fund, ticker DHY.
Over the past 5 years the share price has oscillated around (mostly over) $3.00. It closed at $2.86 today (3/4/15). It currently pays 9.77 % (payable monthly –about 0.8 % / month) and looking at the Yahoo chart it looks like it has not missed a dividend since 2005.. It has a Net Asset Value of -2.41 %, a net expense ratio of 1.95, and total net assets of 281.6M.
From Scottrade: “The Fund will invest at least 65% of its total assets in fixed income securities of US issuers rated below investment grade quality or in unrated income securities that are judged to be of comparable quality. The primary objective is to seek high current income with a secondary objective of capital appreciation. Up to 30% of its total assets may be invested in securities of issuers domiciled outside the US or that are denominated in various foreign currencies or multinational foreign currency units. It may use leverage and derivative financial instruments. Effective 01-May-07 the Fund may invest in and sell credit default swaps at the discretion of the portfolio manager.”
It looks very appealing to me. Can anyone comment on this or similar funds?
I don’t know much about this specific closed-end fund, but there are probably 30-40 closed-end funds that are fairly similar, using leverage of about 30% and focusing on high yield bonds, and yielding something in the neighborhood of 7-10%. Because they use leverage, they are somewhat a yield-curve play, since they probably have short-term borrowing that keeps rolling over and use that to buy long-term (5 year+) bonds, though most closed-end funds trade fairly heavily too, with turnover of over 50% a year. They have high expense ratios compared to open-ended funds, so these funds are more appealing when you can get them at a substantial discount to net asset value (often at the end of the year, with tax-selling), or if you specifically need regular income because most of them manage their distributions (often paying out more than they make in income) to ensure that they can pay a steady monthly dividend.
High yield has gotten a bit beaten up with the oil shock, since a lot of oil stocks — especially smaller ones — financed their rapid exploration and development of shale areas with junk bonds, so there may be opportunities if you want to look through and see which of the CEFs are less exposed to this feared wave of oil bankruptcies (or if you are convinced oil will bounced back this year), but I haven’t looked at them all. Do keep in mind, too, that for many people in higher tax brackets the muni bond closed-end funds offer a similar yield (after tax) and have, I think, much less “real” (as in, the borrower will stop paying or go bankrupt) credit risk.
Hi Travis, thank you for your comments on closed-end funds. I have invested in PCI, PDI,PHK and PTY. The net combined profit with reinvested distribution was 10.3% for one year. For those of us that need monthly income and needs additional investment ideas, the advice and wisdom from the Gumshoe tribe would greatly appreciated
Thanks to all.
A good site for info about CEFs is cefconnect.com for those interested.
Although i have not ever and will never have an interest in bonds of any sort i found your article very interesting and educational (at least for me) as usual. When i think of the time and money i have spent, (and a lot of it wasted) with other newsletters when i could have been a member of Stock Gumshoe. Never mind i am here now and thoroughly enjoying it. I have noticed that when one of your articles is a couple of days old and a new one comes out that there is rarely any more comment on the previous one. So Michael (Doc) as i was the last commenter on the Celiac Disease article could you please have a look at my 2 questions, simple i imagine for you, and see if you can answer them for me.
Thank you,
Don Bright
The vast majority of comments on most articles appear in the first couple days after publication, but they often crop back up in new waves of comments — particularly if a newsletter is pushing the same idea again, or if we move the article back to the top of the page because we’re getting lots of questions. Michael has submitted a list of the answers to many of those celiac comments, he thought it would be easier to summarize the answers in a new post so that will be up shortly… but authors always see all comments on their articles, even if the article is years old.
These look interesting if venturing into HY bonds, Guggenheim BulletShares High Yield Corporate Bond funds with target date maturities. Risk is spread across a number of bonds, and maturity choices.
Love the Gumshoe! When you need to know about these rewording of everyday investments I know you will give a straight forward “what it really is”. I have found many do the same thing by renaming and presenting as if a thing people never heard of. They do the same thing with life insurance as a new nontaxable holding for your nest egg. Then you have some inexperienced mug like me (face it there are new people every day) come along and are biting at the bit with a new idea. Well I am not so naïve anymore. I have Gumshoe! 🙂
Ok, so this was about disguising bonds as ‘Payroll Certificates’. But seems to me (in these uncertain times) that a ‘guaranteed’ 10% on my money aint too bad. The key is ‘Do I trust Oxford to give me the skinny?’ Well, who knows; time will tell how well or badly their service proves to be. But Im not about to cross bonds off my retirement income list. Many stox gain or lose 10% in a day. Will the bond company still be here in 5yrs? Will AAPL be here in 5yrs? All those with a crystal ball please coment.
The point is, that this has opened a new topic thats rarely discussed on GS. Im grateful for all your info.
Alan Bond market is twice as big as stock market and at one time seemed to be safer
as bond holders got paid first. No longer true in US as Obama effectively ignored hundreds of years precedence in auto company bailout. Also when interest rates rise bonds lose value. I think the Fed has trapped themselves into inability to raise rates soon, but it will happen at some point. Bond law in UK may be different but Government can sell you out
in National emergency. Might be good idea to have a garden bed on deck to grow potatoes
and cabbage and have some fishing gear. frank
Thanks for the warning Frank.
Belonged to Oxford Club, they only want your money, aside from that
they are a bunch of scam artists. Just spend time doing your research and reading financial statements, or invest in strong companies that have a long history and services that are needed to run the country, railroads,etc.
i certainly agree with that statement
Alan: Seems to me, a whole lot of financial “advisors” (including ones not connected with companies trying to sell us something) recommend holding a certain portion of one’s investment “portfolio” in bonds. For the reason you noted….virtually guaranteed income, as long as the bond issuer stays solvent. I think McDonald’s “payroll certificate” come-on is absurd – well, the Agora “empire” (Oxford Club, Stansberry & Associates, etc) is the home of numerous examples of very questionable advertising, and includes one person convicted and fined for advertising fraud (Porter Stansberry) – but the basic issue of investing in bonds seems like a worthwhile consideration.
While I find Oxford Club’s advertising for its “premium” services (like Oxford Bond Advantage, and others) truly gagging and nauseating, their services are not always a rip-off. I’ve tried a number of them on and off over the past 10-12 years. Granted, dropping most for a full refund, but not without some success. (It can be a tough slog to figure out how best to use the services; it’s not nearly as “easy” as they would have you believe – surprise, surprise.) I would tend to believe that McDonald is able to pick corporate bonds successfully – those that don’t default – but whether one can realistically get the kind of total dollar returns that he’s claiming in his advertising: almost certainly not, I would guess, unless one has pretty sizable amounts to invest, as Travis notes. Whether there is enough “safety” in bonds in this case….I don’t know, since I’ve never invested in bonds before.
On the other hand, I think the basic Oxford Club philosophy – as reflected in their monthly Communique and their quite conservative recommended portfolios – offers some pretty good advice. It only runs $100-150 per year. Seems clear, they use their wildly hyped premium services to support their more basic activities. I always think it’s absurd that such outfits, which take the moral high ground in some respects, resort to the type of very questionable advertising that they do for their premium services.
So what about buying corporate stock via Computershare? I’m not very familiar with them, but don’t they offer similar benefits with less risk?
Buying stock direct (through a clearing agent like Computershare) versus buying through a broker are now functionally identical, thanks to discount brokerages. Both are the same shares of the same company, so lower in the capital structure and less secure/defined return compared to debt… But with, one hopes, substantially more upside from business growth.
I got taken by these fuckers Oxford FlimFlammers , cost me around $3,000 small money for most on here but alot of money for me and my wife . Now I’ve fallen on hard times and have only about $2,500 to invest . I’m not sure where to go . I’m much obliged for Mr. GumShoes hard work in shedding light on these types of mis-leading investments .
Kind Regards
Sonny
Sonny My best advice is do not buy any newsletter except GumShoe. I bought many and all proved to be about as worthy as a coin toss.
I watch the stock market on TV. I often sit with my laptop and do quick research on what
the guest commentators say. I like value engine for a quick overall. You would be amazed at how many of their recommended stocks come up as SELL. I have absolutely no problem with
my belief that someone just collected a kick back for that advise. It is your money, do your own research! These guys are strangers to you, you sure dont know their motives. Would you really hand your money over to some yahoo walking down the street because he said “Trust Me” ???
I could not agree more with the comments about the Oxford Club. The only good thing I ever got from them was a coffee mug. My so-called lifetime membership bought me only the opportunity to be bombarded with sales pitches for one thing or another. They dropped me off their mailing list some years ago and I do not miss them one bit.