Monday, June 1, 2009

Volume 3, Issue #45

Also in Today's Issue...

Making money in investments requires backbone. We call it risk taking. If you are willing to take an acceptable level of risk, you can usually make money.

If you think you can somehow magically invest without risk you are banking, not investing.

Here's a company that will require a little risk taking but can give you a return well above the long term stock market average of 10% a year, in fact 23% a year, and you can do it in a bond not a stock. That means you will know exactly what you will make, to the penny, before you invest. In my experience, this requires a lot less risk than the average stock investment.

The story goes like this.

A group of very savvy bankers got together and found a way to make money on airliners; 777's, Airbuses, etc. They buy the airliners from the manufacturers, Boeing, Airbus, and then lease them to airlines all over the world, not just the rude, inefficient ones here in the U.S. That's not fair, Southwest isn't rude or inefficient.

The bankers make their money on the spread between what their loans cost them to buy the airplane and what the airlines pay to lease them. These are very long leases and have been very profitable for the bankers.

The planes are leased to the best airlines in the world and they make up most of the newer planes in their fleets. The planes you hear about that are being retired for cutbacks are not the leased airplanes. They are the older less efficient models.

The airlines love this arrangement because it takes all kinds of debt issues off their hands and they have a known cost going forward for an airplane. Maintenance and repairs are their problem, but their balance sheets are not loaded up with billions of dollars of depreciating aircraft that will eventually be worthless.

The bankers love it because they make a ton of money for basically pushing paper, which is what bankers do best. Sounds like a win-win, doesn't it?

Here comes the risk part. This company that leases airplanes is owned by AIG. Yuck!

Wait, this is the only profitable division of AIG and lots of people want to buy it. There was a five billion dollar buyout offer this past month. But it's still owned by AIG, right?

This is where you have to be willing to bet on the winning portion of AIG and take a little risk. Consider this strategy.

There is a very short maturity bond from the company, called International Lease, which will give a great current yield for a few years, 7% and a very nice capital gain, 26%.

The short maturity limits our market risk because we aren't marrying this one for 20 years or more, less than four years. It also carries an investment grade rating of BBB+, which gives us a lot of credit quality to bank on.

Here is the actual bond;

International Leasing, BBB+, cusip 45974va73, coupon 5.55%, cost 79.2, or $792, maturity 9/5/12, or about 39 months. The current yield is 7% (5.55/792) and a total return of 75% (capital gains $208 and seven interest payments of $55 divided by our cost of $792). That's an annual return of 23%.

23% a year from an investment grade bond! You have got to be kidding me!

Yeah but, what if AIG goes under? That's where the fact that International Leasing is one of the only profitable divisions, if not the only profitable part of AIG, comes in.

There are lots of people who want this company. If anything I believe AIG will milk it for a big sale price or continue to run it for the revenues. It's a cash flow cow.

A very profitable company that many people want to own that happens to have a bum for a parent. The real question is will International Lease be in business in 39 months? The answer is yes and this bond will be fine.

As with all investments, limit how much you have in any one bond.

This is exactly the type of strategy I send out every month in the Sound Profits newsletter. It's only $49 per year and you can try it for 60 days with no risk or obligation. I will show you how to get safe, profitable, high income producing investments. Click here for all the details.

Good luck,

--Steve McDonald
Editor
Investor's Daily Edge

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