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How to make money on a company that's run by idiots and resides in a terrible sector



April 13, 2009 – Comments (7) | RELATED TICKERS: AMX

Want to know how to make money on a company that's run by idiots and resides in a terrible sector?  No the answer is not to short the stock.  In many cases, it's too late for that now.  Shorting many of the companies out there at this point is like picking up nickels in front of a steamroller as the old saying goes.

The answer is to buy its bonds.  The beauty of corporate bonds is that the companies that unlike common stock you buy bonds from don't have to thrive and grow in order for investors to make money, they just have to survive.

So what terrible sector am I talking about?  Credit cards.  I have been bearish on credit cards for a long time.  I've ridden Capital One (COF) down a whopping 66.12% and Discover (DFS) down 53.51% in our beloved game so far and I continue to be bearish on their common stock. 

The company that I bought corporate bonds from is American Express (AXP).  The bullish piece on the company in this week's Barron's extols the virtues of AXP's management, but I'm not buying it.  The company had a beautiful thing going, only giving credit cards to the cream of the crop and not even really extending them much in the way of credit because it required most cardholders to pay off their balance every month.

So what did they do, like so many other companies out there they got greedy.  Right into the teeth of the worst recession in decades AXP management decided to forsake what made them such a successful, well-regarded company and ramp up its credit risk by letting more people carry balances and pushing cards on anyone who had a pulse, including a focus on people with multiple mortgages which lead to a large number of cards being issued to residents in the devastated states of California and Florida.  Oops.

AMX management certainly doesn't leave me feeling all warm and fuzzy and I certainly don't like credit card companies yet, but I say who cares.  American Express will survive this mess.  As long as it survives, its corporate bonds are a good bet...provided they have a decent yield.  A few months ago I purchased its corporate bonds that yield 5.7% and expire on 09/15/11 with a yield to maturity of around 7.5%. 

Now I realize that a 7.5% annual return isn't exactly going to light the world on fire, but this is a pretty darn safe bet.  What are the odds that AmEx doesn't exist in September 2011?  Not very high.  Better yet, I only had to tie my money up for a little over two years so I'm fairly protected if massive inflation does rear its ugly head and/or if interest rates do head a lot higher.  Besides, investors in common stock over the past several decades would have killed for a seven and a half percent annual return and the yield is certainly a lot better than the yields that are available on other things out there like Treasuries, CDs, savings accounts, etc...

So how am I so sure that AMX will surive for the next two years when the securitization market that it has tapped for much of its funding in the past may be permanently broken?  The answer Uncle Sam.  There's nothing like riding the government's coattails in investing.  Doing so has worked well for savvy investors like PIMCO's Bill Gross for a while now.  American Express has already received $3.4 billion in funding from the government's Troubled Asset Relief Program and another $5.9 billion from the Temporary Liquidity Guarantee Program (TLGP)

AmEx has access to another $7.4 billion through TLGP, $13.7 billion from credit lines with various banks, and around $25 billion in cash and "marketable" securities (yeah, I know that most things aren't that marketable right now).

This money should easily cover AmEx's needs for the next year.  If it continues to have problems, it still has room to cut costs elsewhere like pulling the plug on its $200 million per quarter common stock dividend program. 

Even though it has been somewhat tarnished in some people's eyes, the American Express name still carries a tremendous amount of brand equity.  It can use this reputation to help it get new money to survive.  The company has also rolled out a new certificates of deposit program in an effort to get funding from retail investors.  It has pulled in a whopping $8.8 billion dollars through this program since it rolled it out last fall.  The company plans to expand this program this quarter by advertising it using direct mail and the Web.

Well, that's why I bought AmEx corporate bonds in a nut shell.  I apologize for any typos, but I don't have any time to proof my work this morning.  By the way, I wonder who this Frost character whose name I always see printed on the bottom on sample AmEx cards is.


7 Comments – Post Your Own

#1) On April 13, 2009 at 8:51 AM, Gemini846 (35.49) wrote:

From our friends at

Dear Cecil:

We've seen all those clever "Do you know me?" American Express ads ad nauseam. But who the heck is C.F. Frost, the other guy Amex features on the sample cards in its ads?

— Frank F., Dallas

Dear Frank:

Charles Frost--or Chuck, as we like to call him--is a real person. He was an account executive for the advertising firm of Ogilvy & Mather, which put together the original "Do you know me?" ads for American Express. Ogilvy and Amex thought it would be convenient to use Frost's name on the sample ads rather than some phony moniker, which would probably turn out to be the real name of some joker in Pocatello who would sue for privacy infringement. Luckily for Chuck, the number on the credit card was not his real American Express card number. Mr. Frost later left Ogilvy & Mather to establish his own ad agency in Manhattan, but he remained on good terms with the folks at American Express. He was an honored guest at a party Amex threw to kick off the fund-raising effort for the restoration of the Statue of Liberty. He was featured in a "Do you know me?" skit during this event, and while it is probable that many of the attendees did in fact know him, he has remained pretty much a mystery to the world at large. We're happy to do our part to give him wider fame.

— Cecil Adams

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#2) On April 13, 2009 at 9:01 AM, arboretum (27.91) wrote:

I like the idea - it might work if you can hold all the bonds to maturity. I don't think I'd buy junk bonds as a trader right now, though.

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#3) On April 13, 2009 at 9:29 AM, TMFDeej (98.34) wrote:

HA thanks for the info, Gemini.  I learned something new today.


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#4) On April 13, 2009 at 11:36 AM, Alex1963 (27.83) wrote:


I'm leery of all credit card companies. I believe there will be another big fall in financials with large credit card related services.

Ticker is AXP not AMX as is in in the ticker slot. I read this thinking initially that this was an article on America Movil



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#5) On April 13, 2009 at 12:53 PM, TMFDeej (98.34) wrote:

Oops, you're right.  I have AMX on the brain because I've been looking at it.  Too bad we aren't given the tools to correct that. 

As far as credit card companies go, I am bearish on them as well.  I'm not advising investors to buy AmEx common stock...just its short-term bonds.  I have looked at the numbers would be absolutely shocked if this company wasn't around two years from now.


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#6) On April 14, 2009 at 2:47 PM, Evlampius (24.00) wrote:

Here's how you will loose your money, in 2 years after governmet will finally see that refinancing everyone's and his mother doesn't work they will start a brilliant money laundry ponzi scheme - debt to equity dilution. For what seems to make you a 7.5% yield in 2 years, will make you a $0.01/share for worthless equity stock. And to that point you should get screwed because as a taxpayer i'm sick of paying for bailouts!

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#7) On April 16, 2009 at 4:45 PM, edgebander (94.90) wrote:

Maybe a stupid question but how do you actually buy bonds.



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