Thursday, March 11, 2010

BAGAKOAA March 11, 2010 A Ghoulish Investment


March 11, 2010 A Ghoulish Investment

If you recall, I did some research for one of our readers back in August and then published the information here on November (16th) about GMAC Smartnotes. Again, thank you Doyle. Well yesterday they were in the news. The Journal did a great article about bonds with a feature called full value right of survivorship. The way they work is that when you buy these bonds, you register a survivor. If you pass away before the bond matures the face value of the bond, typically $1,000 is paid to the survivor beneficiary.

Well, in this twisted world, there are people out there soliciting the elderly and the terminally ill to set up joint accounts, funding the bonds, letting the elder or ill person receive the dividend (interest) payments until they pass and then they receive the face value amount. Of course this only works if you buy these bonds at a discount. (Less than their face value.) For example, the smartnotes I bought back in September in the midst of all the ugly stuff about GM, I got in at $525 each. They have a face value of $1,000. I receive bi annual payments totaling 6% of the face value for each bond. It would have been perfectly legal for me to contact a relative, friend or even a complete stranger and enter into an agreement whereby I would fund a joint account with them, they would receive the interest payments until they die, I would be paid the face value after they passed, and everyone is happy.

Now before you go to Craig’s List and start advertising for old terminally ill people, keep in mind the bureaucracy of getting the survivorship payment takes a couple of months, so it is not that liquid and of course you would be responsible for the gains on the proceeds. I found it an interesting gimmick. (BTW, The GMAC Smartnotes can be had for $765.00, the CUSIP number is 3704A0GN6.)

On Feb 23rd I suggested some $50.00 July calls for TGT. I took some profit on those last week and stopped out last night with a nice 51% gain. I still like the underlying stock, but I am looking for a 7-9% correction before picking up more calls. I would like to see the correction because they are in a little trouble with their credit card business. They sold some of those assets to JPM in late 08, and with the new consumer protection rules in place, it is going to be impossible to get new target customers signed on. The credit card business is worth about 2-4 dollars a share. I’d like to see that drop in price before I get back in again.

There was another enlightening article in Today’s WSJ. It dealt with consumer spending and household wealth. If you recall in early January I suggested that for us to have a 19% increase in the S&P in 2010, it would take two things consumer spending and real estate stabilization. This article explains how consumer spending hit a record low last May and has been slowly recovering ever since. (This is one reason that Cramer announced to the world that the recession was over last June.) What is interesting in the article is that it breaks down the discrepancy in the increase in spending while we have a simultaneous drop in consumer credit lines. In essence we have consumers who are spending and paying down debt. Household net worth has recovered by 5 trillion dollars as of September 2009. It still has about 9 trillion to go before getting back to pre-recession levels. The recovery has been helped by the market recovering and some regional price stabilization in real estate. The article indicates for every dollar of household wealth recovery, about 3-4% goes to discretionary spending. When we were in the depths of the recession, we saw personal savings rates go from 2.2% to a post World War II high of 7.2%. (Still dismal compared to other country rates. China is between 22-29%). In a nutshell, the article suggests that we should see consumer spending to increase by 3% in 2010. Which can be significant.

Ok I will leave you with a VERY RISKY SPECULATIVE PLAY. You know me well enough to know I am not a penny stock kinda guy. Yeah I might be a fluffy casino monkey day trader, but a penny stock no way. I have been thinking about the China Market and how it is developing and how we can make some money. I got burned on CHU and a couple of other bets usually because I got in way too late. Here is one where we could be way ahead of the curve. Possibly way too far ahead of the curve. Let me set the stage. China has a middle income population of about 400 million people. These are people like you and me with homes, cars, jobs, belongings, and stuff. They like us will want to protect the value of those goods from theft, earthquakes, fire, and from their own demise. The insurance industry in China is in its infancy. Long story short, I tripped over a stock called China Insurance on Line. You will never guess what they do. Yeah they sell insurance on line. They also provide their on line service to other insurance providers. The growth of insurance and on line insurance offerings should and probably will explode. CHIO is selling for about 80 cents a share right now. I got in at .81 and continue to collect at under a dollar. My thinking is that this is a 4.00 stock in 12-18 months. I will lick my wounds at 50 cents willing to take a 40% loss. I think the upside could be kinda a cool, but only play with your Vegas dollars as this is extremely speculative and highly highly risky. To quote Billy Joel, “You maybe right, I maybe crazy. But it might just be a lunatic you’re lookin for.”

Salve Lucrum


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