RE: Risk/Reward vol.8 Sent: Friday, July 23, 2010 4:25 PM

THIS IS NOT INVESTMENT ADVICE.  IT IS A PERSONAL REFLECTION.  DO NOT RELY UPON ANYTHING STATED HEREIN. My study of trust preferred stock (TruPS), which I do not like, has led me to investigate a similar product--third party trust preferreds.  These are trusts created by a third party (not the issuer of the debt), usually an investment house such as Morgan Stanley which purchases large denomination debentures of corporations such as IBM and then issues trust certificates in $25 denominations which represent a fractional share of the benefits of  owning the debenture.  The fractional shares mature when the underlying debt matures and they pay roughly the same yield depending on how the underlying debenture is faring.  These were designed with the retail investor in mind and represent what appears to be an excellent way to purchase exposure to a fixed income arena that is normally reserved for institutional investors.  The fractional shares trade on NYSE or OTC like equity.   Unlike TruPS, the trusts do not serve as Tier 1 capital for the issuer and thus generally do not carry the risk of payment deferral.   A demonstration of their viability is the fact that these vehicles were invented by Lehman Brothers and Bear Stearns and despite the demise of those houses the underlying trusts which are administered by real trust companies have survived and continued to perform.  Take a look at TZF (IBM), XFR (Bristol Myers), PYO (Daimler) and for some higher risk MJF (Cummins).  These have current YTM of between 6 and 9%.   My one concern is how thinly traded they are, making a quick exit problematic.  Ironically, this may lead me to purchase the shares of the trusts of riskier companies (e.g. Ford, Cummins, etc.) because they have consistently larger daily volume.  Remember, one of my goals is to maintain virtually instant liquidity. Since our last letter, I have purchased some add on positions and have included some Ameriprise exchange traded debt (AMPpA).   I began the portfolio on May 10, 2010 when the market was 300 points higher than its close today.  The portfolio is "fixed income" with none of the investments having less than a 6% dividend/interest component.  On average the fixed income return exceeds 7%.  That fact notwithstanding the portfolio has increased in principal value 3.5% in just 10 weeks.   I have sold nothing.   Currently,  no investment is more than 4% below my entry price and during the entirety of the program no investment has fallen below the 8% stop loss threshold.  It is designed to be "steady as she goes".   So far so good with a little uptick.