I'm bringing you two new Reverse Convertible notes today.
You'll remember that Reverse Convertibles offer us the opportunity to receive a high coupon and a predictable income stream. At maturity, the investor will receive his or her original investment amount -- or a predetermined number of shares of the underlying stock whose value will be lower than the investor's original investment amount.
Who should consider this kind of investment?
The answer is only investors who are looking for a higher interest rate than they can find with conventional, fixed-income investments, and only those willing to accept the risk of owning the underlying stock. Always remember that if the Reverse Convertible "knocks in" i.e., drops below the protective barrier, then you'll own the stock at that price.
In the case of First Solar (FSLR) the knock-in price is 50% below the Tuesday, May 27 price, and in the case of Joy Global (JOYG) the knock-in price is 30% below the Tuesday, May 27 price. At that point you'll be in the stock and hoping the stock price recovers so you can earn back the hit you just took. It's not very likely that either of these stocks will drop that low, but there are no guarantees that can't happen, and you need to be fully aware of that fact.
Also, before we go any further I want to remind you that I will continue to put my primary focus and energy into our 25% Cash Machine Core Portfolio. These Extreme Portfolio issues I recommend are for the investor who wants a way to go after 15% to 20% pure income, with a lot more risk and no upside in capital appreciation.
With the market consolidating its recent gains, we have an opportunity to buy into some structured products tied to certain underlying stocks. I'm pretty confident they will appreciate from their current levels during the holding periods for each name.
To fully understand the nature of this beast I'm going to review what Reverse Convertibles are. Remember, the risk is all about the underlying security and if you don't want to run the risk of owning that, you shouldn't buy these hybrid securities.
Structured products, like today's Reverse Convertibles, are synthetic investment instruments specially created to meet specific investor objectives that may not be met by the standard financial instruments available in the market. They have been used as an alternative to a direct investment, as part of the asset allocation process to help reduce risk exposure of a portfolio, or to take advantage of the current market trend.
You can also view Reverse Convertibles as high-powered CDs, but without the protection you would normally get with a CD. They are, rather, a combination of derivatives and financial instruments used to create structures that can offer significant risk/return, and/or cost savings profiles that may not be otherwise achievable in the marketplace.
Structured products are designed to provide investors with highly targeted investments tied to their specific risk profiles, return requirements and market expectations. The idea is to take most of the guesswork out of the return and hope that the underlying security doesn't crash during the holding period. It's as simple as that, my friends.
This is going to sound like some kind of routine disclaimer, but it really is a good idea to read the prospectus of any of the structured products I recommend and become more familiar with this highly creative class of income security.
Personally, I find Reverse Convertibles fascinating and very-promising investments, and that's why I've added the new Extreme Income portfolio to our 25% Cash Machine service. I was happy to hear from some of you at the Las Vegas Money Show that you agree with me.
Finally, for anyone interested in Reverse Convertibles, but still too confused about them to feel comfortable placing the buy, I'm going to spend some time tomorrow in our Weekly Update providing a CliffsNotes version of the why and how for these securities. It's something that I hope will answer any lingering questions and will also serve as a "rule book" we can refer to whenever necessary.
You'll need to call your full service or online broker and submit for each offering by providing them with a description and CUSIP number -- both of which are provided below. Both of these Reverse Convertible notes mature in six months. The 20% and 15% coupon rate for each note is an annual rate of return -- meaning you are getting 10% and 7.5% on your invested capital for six months, to be paid in equal monthly payments.
Just to refresh your memory, as long as shares of First Solar don't drop by 50% and shares of Joy Global don't drop by 30% during the holding period, we will receive our principle back in cash.
If either or both stocks fall through their respective downside protective barriers, then we will be put shares of the stock when the note matures, meaning you will own the shares at the reduced price.
Both of these offerings are also open offerings that have a midday cutoff for orders. That means you can buy either of these two Reverse Convertible deals through mid-Tuesday of next week -- but don't forget that Monday is Memorial Day, so it's a holiday and markets are closed.
Keep in mind that if you don't make these buys, there are new issues every month (a buffet table of them) and I'll be bringing you more recommendations. I aim to build this list to the point where we own several issues in the weeks and months ahead, so don't stress about not getting in if time becomes an issue.
Where to buy is always a question I'm asked by subscribers. For those of you who are ready to strap in and take the fast ride, most brokers, even online brokers, should be able to place these buys for you.
While many brokerages can sell you Reverse Securities, on the off-chance yours can't, I'm going to provide the names of three reputable brokerages that will handle the transaction for you. Keep in mind that due to the time-sensitive nature of these two new issues, they are being priced next Tuesday, May 27.
Schwab Fixed-Income Desk: 1-800-626-4600
Schwab is a well-known brokerage and it can place these buys for you. You can contact Schwab's Fixed-Income Desk at 1-800-626-4600.
TD Ameritrade Fixed-Income Desk: 1-800-355-2297
You can also call TD Ameritrade Fixed Income directly at 1-800-355-2297. They will allow you to put in for any deal without the use of a broker or an adviser as a go-between.
Stifel, Nicolaus & Co. -- Craig Starr: 1-800-225-8532
Finally, Stifel, Nicolaus & Co. in New York City specializes in fixed-income and structured product investments, especially the Reverse Convertibles that I'm recommending. Craig Starr, and the other folks there, will be glad to assist you in buying these new issues right over the phone -- no paperwork necessary -- and that's about as easy as I can make it for you.
Be aware that you'll need to establish an account in order to buy, but the folks at Stifel told me they would do everything in their power to help you establish the account quickly and still get in on these particular buys.
The company can be reached at 1-800-225-8532. I have worked closely with Craig in the past and can vouch for how efficient and responsive he and his people are to the structured product markets. They make investing in these securities easy if you are struggling with your own firm.
Buy the 20% First Solar Reverse Convertible Notes due 12/1/08 -- CUSIP# 06738RZM1 and the 15% Joy Global Reverse Convertible Notes due 12/1/08 -- CUSIP# 48123M2C5. You'll need to act fairly quickly if you want to get in on these offerings for this month.
I don't feel as if I can say this often enough: This investment discipline is not for everyone and you need to fully understand the risk you are taking, along with the upside potential. I'm not trying to scare you away from these investments, but I do want you to know what you're doing before you do it.
If you're not comfortable enough with Reverse Convertibles to buy today, hold off until you've got all the information straight. Don't worry about missing out, because I'm going to continue to write about them and bring you new opportunities.
Stay tuned and I'll see you Friday with the Weekly Update.
Bryan Perry
Editor The 25% Cash Machine