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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (30859)	8/10/1998 6:11:00 PM
From: Knighty Tin	Read Replies (4) \| Respond to of 132070

Tip, 4 3/4 to 27 1/2!!!!! Nice yearly price range. -g- I first talked about Capstead way back after Orange County went belly up doing IOs. But I didn't single them out. I just mentioned that there were a number of money managers who were still trying to see if they could top Merrill and Orange County in the brain dead mortgage sweepstakes. I picked on them a bit because one night I was giving a speech at a bond seminar and I talked about using options and futures with Treasury securities, the smartest way to play fixed income. One of the Capstead guys button-holed me later and said that his firm would never do anything so risky as to hedge with options and futures. -g- I figured he really got it, since my whole point was how to make Treasuries less risky. I guess that is why they call me Burke the Obscure. -g- IO stands for Interest Only. These are parts of stripped mortgage securities. To make a long story short, with an IO, you are betting that rates go up and bonds go down in price. When rates decline and bonds go up in price, you suck wind. There is nothing inherently wrong with IOs or POs (Principal Only) or any of the other motley crew of mortgage derivative instruments. What kills these guys is the pricing and the leverage. First, since IOs are packaged by brokerage firms to slow-witted people on the buyside, they are usually sold at inflated prices. Secondly, since they represent interest from a govt. guaranteed security, in most cases, you can leverage them out the wazoo. And many of the buysiders did so. Orange County was killed by being leveraged long and wrong. Capstead did the same thing, but they only lost 30 pct. of their net worth. Still, that isn't good for a "growth" co. BTW, the same thing that IOs do can be achieved with puts on Treasuries, but that is a low commission item, so the dummies on the buyside never hear that story. MB