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Subject:  Wal-Mart's Bonds Date:  3/27/2009  2:33 PM
Author:  junkman02 Number:  26538 of 35340

I'm a person who “eats his own cooking”. If I suggested in another thread that now is a good time to be shopping for bonds, then shopping I go. How I got to looking at Wal-Mart's bonds doesn't matter. But I got to looking at them to see what might be happening. E*Trade was listing 16 offerings, as was Zions, but not the exact sames ones, which is typical. Every bond broker will offer you a slightly different inventory that often has slightly different pricing. So that's always Rule #1 with bond shopping: "You gotta shop around". But in the initial stages of trying to see what's happening, those kinds of small differences don't matter. What you want is just a general sense of where the market is at with respect to their debt:

How much of it is being offered?
Does it seem like someone is dumping?
How tightly is it bid?
How accessible is it? (i.e., what's a typical minimum-purchase?)
What's the shape of its yield-curve? (Where are the “sweet and “sour” spots?)
And, especially, is its yield-curve inverted?

That last point, "yield-curve inversion", is all the warning you need to proceed no further. The market is betting that the company is headed toward a Chapter 11 filing. That's a train-wreck you do not want to get in front of. (Recognizing inversions would be part of Jack's toolbox of “mark-with-chalk, cut-with-ax”.)

Wal-Mart's yield-curve is normal, a bit steep at the front-end, but normal. That's A-Good-Sign (AGS). The yield are paltry, but that's the case these days with the bonds of companies that the market is betting have the best chances of surviving the recession. Quality and Safety cost money. So “safe” debt doesn't come cheap. So the question with respect to Wal-Mart's debt is this: "Are their bonds cheap enough to merit further investigation?"

Of the sixteen maturities being offered, fifteen are priced above par. That is Not-A-Good-Sign (NAGS). Some of the premiums are paltry, less than a point. But several are a whopping 15-16 points. Ouch! That would hurt, especially if the bonds were long-dated. The thinking is this: You'd be trading a lot of present-day, nominal cash in exchange for much less nominal cash in the long-distant future whose purchasing power, most likely, would be much diminished by the ravages of inflation. The CAPM boys could provide you with very precise estimates of what that future cash would be presently worth. But since the assumptions they use to make their estimates are the same, very imprecise guesses you yourself have to make about the future course of inflation, you could just rely on gut feelings as the basis of a decision to Avoid-That-Kind-of-Hassle (ATKOH). If you want to bet on inflation, for or against, there are more effective tools than long-dated bonds that cost a huge premium-above-par to buy.

Regrettably, the best buying-point in Wal-Mart's yield-curve (IMHO, 'natch) is their 7.55's of '30. However, the ask is roughly 16 points above par. That's a trade I would back away from doing. The broker's reported YTM of 6.15% YTM just isn't worth the risk. Furthermore, when you run your own YTM numbers through Excel, allowing for a $5 commish to do the the trade and properly subtract the premium-to-par from your total-returns, the effective YTM is ~30 bps less, or 5.82%, which is Really-Not-Worth-The-Risks (RNWTR).

I'd love to be able to buy Wal-Mart's bonds. They're a well-managed company with a huge global-presence. They are going to survive. But, currently, their debt is prohibitively-expensive. They are the sort of company you put on a wish-list/watch-list against the day when something truly crazy happens and their bonds, inexplicably, get put on a fleeting, Blue-Light Special (BLS). If such a thing happens, you execute and call it Luck (L). But, as the wags have noted, luck is mostly preparation, plus opportunity (L=PPO). That's why you do your homework now, so you can act then.

Charlie (who now returns to his shopping)