“Lock in” Gains with “Minimum Notes” — True Income

By Travis Johnson, Stock Gumshoe, February 19, 2009

Quite a number of you have sent notes to me about these, um, notes lately — if you’re on many of the newsletter or financial mailing lists you’ve probably seen them, too. This is a teaser that promises …

Buy this investment today and “lock in” a minimum gain of 244% (It could possibly even return
as much as 1,002%)”

It’s also making the rounds under the headline, “What is 2008’s best investor buying now” — a reference to John Paulson, who apparently calls this type of investment a “$10 trillion opportunity.”

Sound familiar? Yes, you’re right — we’ve looked at this one before, little has changed except the name that they’re giving to this investment, but there were some additional specific recommendations in the ad so I thought I’d take a quick look for you.

First of all, what are these “Minimum Notes” that they’re telling us are being recommended by Jeff Clark for his True Income service? They are, as far as I can tell, exactly the same thing as the “Mega Bonds” this same service was teasing us about a couple weeks ago. Truth be told, I do like the name “minimum notes” better, seems more appopriate for our times … but really, the name I like best is the real one, “convertible bonds.”

Convertibles are just what they sound like, bonds that can (or sometimes must) be converted to equity according to whatever the specific terms of a possible conversion are (just about every bond is different). They’ve been getting a lot of attention lately because they offer the stability of bonds and a set coupon payment, and the possible participation in the upside of a stock if the underlying company performs well or the market rallies significantly. If you want more information about convertibles in general, you can read my earlier, long winded discussion of “mega bonds” here, or, for a similar teaser from Justice Litle, my discussion of a closed end fund that holds convertible bonds here.

(Justice called them “Crisis Bonds,” by the way — so what’s your favorite term: Crisis Bonds, Mega Bonds, or Minimum Notes? We can have our own little marketing focus group right here.)

I know that many publishers are pushing a corporate bond strategy with at least one of their newsletters, and that corporate bonds of all types, including convertibles, have become the “it” investment over the past month or so … so it may well be that you’ll find some protection in bonds and their set coupon payments and promise of principal repayment, or that they will offer considerably more stability than equities, as they typically have in past years. I don’t really know what will happen, of course. I’m sympathetic to the argument that everyone should hold bonds as well as equities, an argument that probably was shouted down too aggressively by most financial pundits over the last 15 years as individual stock market investing became fun, easy, and popular for a whole new class of investors … but on the other hand, I haven’t personally bought any bonds and I’m not sure I know how to analyze them effectively.

I do know that in the original Mega Bond article I told you about two specific convertible bonds that Mike Williams appeared to be “teasing” as current recommendations of his True Income service, and as I read through this new version of the teaser I saw clues for a couple more that I thought I might share with you. Let’s have a look …

These are both based on a $10,000 investment, which at face value would usually be ten $1,000 bonds, but on the secondary market most corporate and convertible bonds probably trade at a discount to their principal value at the moment. Here’s what they say you could make:

“One of the world’s largest semiconductor companies offers to pay you a 455% return on December 15, 2016, in addition to a $2,812 income check every six months…”

OK, so this one is a guess: sounds to me like it could be ON Semiconductor (ticker ONNN). This is a decent sized semiconductor company, market cap of $1.5 billion or so. They have a convertible bond that matures on December 15, 2026, but bondholders can require the company to pay back their principal on several dates before then, including December 15, 2013 and December 15, 2016. The conversion rate is something like 95 shares per $1,000 principal value of the bond, and you can convert beginning in June of 2013 if you like (wouldn’t be worth it now, by a long shot — the shares are at $3.75, the bond is trading at about $65 right now per $100 of principal (so $650 per $1,000).

This could easily not be a match, I’m not sure — the teaser says that a $10,000 invest