ISM Questions

[dm]

I bought some ISM without really understanding it. I know it paid dividends but are they taxed as dividends or interest? I didn't buy much so its really not a big deal, but now I have some additional money I'd like to put somewhere.

How does ISM compare with I-Bonds? It was my understanding that the dividend or interest ISM pays adjust with inflation. But the share price of coarse can vary.

What happens when interest rates go up. Would ISM drop in price or would the dividend go up?

 

[wabmester]

The divies should be taxed as interest -- these are just exchange-traded bonds.

They have a much higher yield than i-bonds, but i-bond interest is tax deferred and principal is guaranteed.

When real interest rates rise, the price of ISM should go down. When inflation rises (which can also make nominal rates rise), the yield of ISM should go up with little or no change in price.

 

[youbet]

Remember in your planning that ISM monthly interest payments will vary significantly. Based on my average cost per share (not par):

12-15-06 through 1-14-07 4.68%

1-15-07 through 2-14-07 3.82%

2-15-07 through 3-14-07 4.58%

3-15-07 through 4-14-07 5.23%



*edited to add additional month

** edited again to correct the mistake I made when I added the additonal month! Sorry 'bout that!

 

[cute fuzzy bunny]

When inflation rises (which can also make nominal rates rise), the yield of ISM should go up with little or no change in price.

Perhaps. Some of the price pulldown may be attributable to low current inflation. Its conceivable that the issue may become more attractive at higher CPI levels. But then again its a limited, thinly traded issue thats probably not as well known to enough investors to produce any big lift.

The other difference between tips/ibonds and ISM are that while the tips/ibond principal is guaranteed, IIRC one or both can reduce previous gains applied to principal if deflation occurs, while ISM will simply pay no interest without degrading the principal. And since ISM can be bought at a discount now and redeemed for full face value, holders until maturity are all but guaranteed a capital gain.

Its an interesting little critter, for what it is.

 

[Anansi]

12-15-06 through 1-14-07 4.68%

1-15-07 through 2-14-07 3.82%

2-15-07 through 3-14-07 4.58%

3-15-07 through 4-14-07 6.13%

Can you explain your yield calcualtion a bit more? I come up with higher yields for every period when I look at ISM. I understand we have different acquisition costs, but I would expect the difference to be minor. Or my math is simply wrong, which is always a possibility.

 

[brewer12345]

Perhaps. Some of the price pulldown may be attributable to low current inflation. Its conceivable that the issue may become more attractive at higher CPI levels. But then again its a limited, thinly traded issue thats probably not as well known to enough investors to produce any big lift.

I am reasonably thoroughly convinced that ISM si grossly misunderstood by its holders, who are mostly unsophisticated retail guys. So when the payout slumps, they will dump it to absurd levels, and when inflation backs up, they will bid it up foolishly. As such, I plan on keeping an eye on ISM, OSM, and PFK for the forseeable future for trading opportunities.

 

[wabmester]

These issues are so thinly traded that guys like brewer and Ha will single-handedly correct any pricing misbehavior.

 

[cute fuzzy bunny]

Hey, I dumped a few percentage points into it just so I could feel like I was doing something, and I think I made it pop 19c all by myself.

Brewer - I had the same feeling...somewhere in the next year or so we might see a little pop and I could make a little lobster/champagne money. Worst case it'll probably come close to matching the better CD rates I can get and i'll get a little pop at redemption time.

 

[brewer12345]

Brewer - I had the same feeling...somewhere in the next year or so we might see a little pop and I could make a little lobster/champagne money. Worst case it'll probably come close to matching the better CD rates I can get and i'll get a little pop at redemption time.

That's pretty much how I look at it. Worst case is that I have a high quality bond paying a silly-high spread over CPI that I hold to maturity. Best case is that it oscillates between 21 and 24 several times in the next 5 years.

 

[justin]

I put about 4% of my porfolio into this (got in at 21.33 in december).

Worst case, I make a decent return over 11 years with very little risk.

Best case, it does as brewer says and bumps around 21-24 a few times.

 

[cute fuzzy bunny]

Best case is that it oscillates between 21 and 24 several times in the next 5 years.

That'd be sweet...I'd love to use up some of my free vanguard trades. Woo hoo, I feel the testosterone flowing now as I ...trade...some...high grade...cpi indexed....bonds......

Wow that doesnt feel the same as swinging around six figure lumps of QQQ's in the late 90's...

 

[youbet]

Can you explain your yield calcualtion a bit more? I come up with higher yields for every period when I look at ISM. I understand we have different acquisition costs, but I would expect the difference to be minor. Or my math is simply wrong, which is always a possibility.

Well, here's what I did, following the formula in the prospectus.

For Jan 15 to Feb 14 yields:

CPI Oct '06 201.8 - CPI Oct 05 199.2 / CPI Oct 05 199.2 +2.05 = 3.35

If you purchased as less than par (who didn't?), mulitply by par/your cost.

Questions?

 

[JohnEyles]

Well, here's what I did, following the formula in the prospectus.

For Jan 15 to Feb 14 yields:

CPI Oct '06 201.8 - CPI Oct 05 199.2 / CPI Oct 05 199.2 +2.05 = 3.35

If you purchased as less than par (who didn't?), mulitply by par/your cost.

Questions?

Yeah, where do you get this CPI data ? I've tried the Bureau of Labor Stats
(or whatever) website, and there's SO much data there that I can't seem to
just get these simple numbers.

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

 

[justin]

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

The formula is in the prospectus.

February's interest payment is going to be particularly small. Anyone think that we might see a nice dip due to the low interest payment?

 

[ats5g]

Yeah, where do you get this CPI data ? I've tried the Bureau of Labor Stats
(or whatever) website, and there's SO much data there that I can't seem to
just get these simple numbers.

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

Rusty,

CPI-U at All Urban Consumers - (CPI-U) from 1913-2006.

- Alec

 

[FIRE'd@51]

3-15-07 through 4-14-07 6.13%

This one doesn't look right to me. It is inconsistent with your other yields, even based upon your cost.

CPI-U for Dec 2005 = 196.8

CPI-U for Dec 2006 = 201.8

inflation adjustment = -1 + ( 201.8 / 196.8 ) = 0.0254 = 2.54%

April dividend = 2.05% + 2.54% = 4.59% (on par)

yield = 4.59% x ( 25 / cost )

 

[FIRE'd@51]

How does ISM compare with I-Bonds? It was my understanding that the dividend or interest ISM pays adjust with inflation. But the share price of coarse can vary.

Another difference is the interest from ISM is subject to state & local income taxes (if held in a taxable account) while that of I-bonds / TIPS is not.

 

[youbet]

Yeah, where do you get this CPI data ? I've tried the Bureau of Labor Stats
(or whatever) website, and there's SO much data there that I can't seem to
just get these simple numbers.

Also, how do you know the interest paid lags the CPI numbers by a couple
months ? Seems kinda odd.

It looks like alec and justin have answered your questions. In addition to the url Alec gave you, you can sign up at the site to receive automatic emails which give you each succeeding month's cpi numbers as they are announced. Very quick and easy and delivered to you the day they are announced!

You really need to read the prospectus. This is not a straight yield calculation because of the time offset. The prospectus is very easy to read and even gives simple examples of doing the calculation.

justin - you would think that if low monthly rates for this period and next were going to drive share price down, they would have done so already. But who knows? Perhaps people actually need to see the low amounts actually credited to their brokerage accounts at the end of the period to decide they'd rather have some of those 6.25% CD's instead and sell.

I'd also like to point out something about the payout scheme for ISM people should think about before they buy. One of the ways ISM is different than TIPS is that at maturity ISM will return your money at par with no inflation adjustment. TIPS will return your money at par plus accrued inflation adjustments. I'm comfortable with the ISM payout scheme, but if someone is looking for their original investment to compound, inflation adjusted, over the holding period, ISM doesn't do it. You receive an interest payment monthly and need to reinvest it.

youbet

 

[justin]

justin - you would think that if low monthly rates for this period and next were going to drive share price down, they would have done so already. But who knows? Perhaps people actually need to see the low amounts actually credited to their brokerage accounts at the end of the period to decide they'd rather have some of those 6.25% CD's instead and sell.

It's true that the next couple of interest payments are public knowledge at this point and the div amounts should be baked into the market price. Assuming perfect levels of knowledge of all market participants. However, if Brewer's theory that a good bit of ISM is owned by retail investors who haven't read the prospectus, then they won't know that the div payments are low until they get their february statements or they look at Yahoo! Finance-type websites and see the yield number drop. I'll probably buy another chunk if the price gets close to 21.00.

 

[youbet]

This one doesn't look right to me. It is inconsistent with your other yields, even based upon your cost.

CPI-U for Dec 2005 = 196.8

CPI-U for Dec 2006 = 201.8

inflation adjustment = -1 + ( 201.8 / 196.8 ) = 0.0254 = 2.54%

April dividend = 2.05% + 2.54% = 4.59% (on par)

yield = 4.59% x ( 25 / cost )

Thanks FIRE'd@51!!

Yep, my eyes must have crossed when I was looking at the table on the web site. I used the 2005 annual cpi number, 195.3, instead of the 2005 Dec number, 196.8. Well, dang it!

I went back and edited my original post to correct it.

Thanks again!

 

[JohnEyles]

Rusty,

CPI-U at All Urban Consumers - (CPI-U) from 1913-2006.

- Alec

Cool-o, thanks. But it's slightly broken, this worked better for me:
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt