My extended dalliance with Transocean deserves a bit more discussion. The Global Marine bonds of 2027 have drifted down to the 34 range, a huge drop from my average purchase price of 70. Other Transocean bonds have had similar drops. Yet, over the entire span of trading these bonds, my net capital loss to date is a relatively small $32,000. Meanwhile, the bonds have returned $110,000 in interest. My bout of trading Transocean options worked out quite a bit better: a net return of $58,000. So, while the stock dropped overall from roughly $20 to today's $1.43 and the bonds have dropped to a CCC+ near-default rating, with a commensurate price drop to the mid-thirties, I have nevertheless made a very fair amount of money with Transocean. Considering that I was drastically wrong about the company and its prospects over the five years I gnawed at the company's investments, a net $135K return is, well, very much OK. Mind you, I had no business taking on such risks, but I'll take the final result. Of course, I still own a few bonds, and might well see them drop to zero, but I'm inclined to think they will end up, at worst, as a wash from here. If the company survives, they will sky-rocket, and even in bankruptcy, there might still be something here to mitigate the pain. In fact, there is a bond maturing this fall, 2020, with an annual yield of 20%. I've nibbled.
Despite all this awfulness, I still see some absolutely huge opportunities. In fact, today's environment is very similar to the dark days of 2008-9. Then, the elephant was the US government's embrace of America's largest banks, turning their 10% plus distressed bonds into investment gold. Well, guess what: the Fed is now extending the same favor to a select group of distressed American corporations: most particularly to Ford and GM. Ford was recently downgraded to upper junk. In response, the Fed committed to buying its bonds, directly! As in 2008, the message is crystal clear: if the US government has any say about it, these companies will not be permitted to fail. So, that's a de facto AA rating. Using the logic I last employed in 2008-9, I started buying Ford bonds sporting 12% yields; and nabbed a short-term Macy's issue yielding 24%. As the bond prices started rising, I bought more, and then more. It's easier to handle psychologically when the thing you're buying is rising daily. My paper gain, in less than two months of aggressive purchases, is $102,000.
The rebound has been large, but yon can still get Ford at yields just over 8%. Why should you be excited about 8%? Well, remember the magic of margin. At the exact moment that Ford and Macy's yields soared, the Fed cut its rates to near zero. As a result, Interactive Brokers will now lend me money at an annual rate of 1.15%! Assuming a fairly conservative borrowing ratio of 1:1 (half equity, half margin), $5,000 invested in an 8% Ford bond will yield $743, a return of 15%!
Part-way into our Covid journey, I have suffered a net worth loss, on paper, of 10%, but have seen my annual income rise by 12%. The risk side is a very heavy exposure to a single company (as was the case with Goldman Sachs in 2009), but mitigated by an effective government guarantee.
Is there a lesson to be learned? Absolutely. In "normal" times, reaching for yield is really quite dangerous. Between 2016 and 2019, I bought a number of fallen angels (Bed Bath and Beyond, Signet Jewelers, L Brands), issues newly rated at junk, with yields hovering under 7%. The Covid crash has made clear that 7% is not enough yield to justify that risk. All three issues suffered further downgrades, and plummeted in price, eventually resulting in yields over 10%. They may all recover, in time, but the recovery will probably only return them to where I started. So, in "normal" times, it's probably a better idea to either park the money in cash, or accept the pedestrian yields available from investment grade debt. It has become fairly clear to me that there will always be a new black swan, something unexpected that will arrive from nowhere, and terrify the timid. Then the power of brave investing emerges. So, it's better to be patient.
Update: August 6, 2020. The magic moment was very brief; so I reverted to my own advice. And lo and behold, the power of patience emerged in spades! The steady recovery in bond prices has made my results drastically better. My net worth paper loss from a February peak is now only 2.5%. My income is now up 16.66% since February, while the paper profit on Covid purchases is over $220,000. A note of caution: I am utterly flummoxed by the divergence between the stock/bond market (rosy prospects) and the clearly observable economy (an abysmal sink hole). The obvious explanation is that the Fed is committed to propping the economy, no matter what. Fortunately, this is a bipartisan stance. While a number of Republican troglodytes are kicking and screaming, everybody else understands the need to keep the economy afloat. The election of Joe Biden will, like that of Obama under similarly dreadful circumstances, work to keep the ship afloat. So, as in 2008, the effective government guarantee of key industrial bonds will have been a windfall for investor who were brave when investing took courage. Ahem, ahem.
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