Why Do This?

When I published my 100th blog entry, less than two years ago, I wrote a piece about why I write this blog and now that I recently posted my 200th entry, I thought it might be interesting to revisit the topic.


Nothing has really changed in terms of why I spend some of my time this way. Clearly, it is for my own benefit and the fact that along the way I've had thousands of visits to my blog, is gratifying but incidental to "the mission." How do they arrive here? Some friends tell me they visit (while others pointedly say they never have as they don't "do" that sort of thing, which is ok with me too). But mainly, people land here from Google searches, some from Google Images as I frequently include photographs with my entries even though they may not be called for by the piece.

Long ago I decided not to activate a comments feature on the blog as it was not my objective to get involved in public discourse. However, there is an email address in my profile and from time to time I receive email about my pieces, particularly the more political and economic ones where I have a viewpoint and recognize that others have their own and I have always responded. My favorite email though was from the adult daughter of a friend of mine I mentioned in a blog, she saying "It's always so eye-opening to see your parents in a different light....I was extremely touched by your piece....[and] thank you for sharing that. It meant a lot to me." Even though I mostly write for myself, it is nice to know that some of what I do in these virtual pages might benefit or interest others.

Barry Ritholtz who has been blogging for more than ten years under the rubric The Big Picture, recently wrote an interesting piece on why people might blog, and I was fascinated by his observation that his own blog would be the same whether 100 people visited it or 100,000 daily. Clearly his visits would be closer to the latter and mine to the former as his blog is financially oriented and he is well-known in his field.

But, we have many of the same reasons (not all) to blog, and here are his:

1. You have something to say
2. You enjoy the craft of writing
3. You want to figure out what you think, and do so in public
4. You want to be part of a larger community of like minded individuals
5. You have a hobby or interest that you are really, really into
6. You want to maintain a presence on the Intertubes
7. You have an expertise and you want to share it
8. You have an eye for content (text, graphics and video) and you enjoy leading other people to them
9. You want to create a permanent online record of what you are reading, looking at or thinking about
10. You like engaging in debate with total strangers

The first three would be among my major reasons for doing this, although the others, except for the last, enter the equation as well. I guess I would have to add family history to the mix too.

In regard to "making an online record," I finally figured out how to get a PDF onto Google Sites so this is a link to a 1984 Publisher's Weekly article during my salad days. It is amusing (to me) to read about my vision of specialized publishing at the time and what the future might hold. It is pre-World Wide Web, so it has to be taken in that context. It was also amusing to share that particular issue with "Mr. T."

So, on to the next hundred, but for a while I am taking a break.
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Finishing the Hat Redux

Finished Sondheim's book Finishing the Hat but his melody lingers on.

The title of the book is a song title he wrote for Sunday in the Park With George (George Seurat, the Pointillist painter) and although that musical is after the cut off for this first volume of his "Collected Lyrics with Attendant Comments, Principles, Heresies, Grudges, Whines and Anecdotes," he says it is “the only song I’ve written which is an immediate expression of a personal internal experience.” And that experience is about what it means to create a work of art, "That, however you live, / There's a part of you always standing by, / Mapping out the sky, / Finishing a hat... / Starting on a hat../ Finishing a hat... / Look, I made a hat.../ Where there never was a hat."

Although now eighty years old, Sondheim still seems to be blazing new trails, with this book and the eagerly anticipated sequel which will cover the balance of his career and his continuing observations on Broadway colleagues and collaborators. (One of his criticisms of his mentor, Oscar Hammerstein -- and Richard Rodgers as well --- is that at a certain point in their careers, they no longer progressed, writing their musicals with a certain formula. Sondheim allows no grass to grow under his feet!) I began this "review" (on a very personal level) before completing this first published volume, unable to contain my enthusiasm.

So I now pick up with Little Night Music "suggested" by Ingmar Bergman's Smiles of a Summer Night. Sondheim says it gave him the opportunity to organize a musical around his favorite musical form, theme and variations, in which a theme is presented, and then follows various changes to that theme, either in key, harmony, orchestration or a more complicated musical variation to the theme which might even be unrecognizable, with a coda which usually repeats the theme in some way. His description of his meeting with Ingmar Bergman a year after Little Night Music opened, to discuss a possible collaboration on another project is priceless. Sondheim said to him: "...I have to know what you thought of the show, and please don't hesitate to tell me whatever you feel, as I have a very thick skin and I know our version is lightweight and doesn't begin to convey the depths of your movie....I'm sure I went babbling on a good deal longer, but he graciously cut me off. 'No, no, Mr. Sondheim, please. I enjoyed the evening very much. Your piece has nothing to do with my movies, it merely has the same story.' I thought: only someone with that understanding and generosity would realize, must less say, such a thing. and then came the kicker: 'After all, we all eat from the same cake.'"

Sondheim's most recorded song (over five hundred) is from this show, "Send in the Clowns." Paraphrasing Sondheim, it used to be the song, not the singer that made a song, but in this pop generation, it's now the singer (or song group) not the song. It was amazing to him that the song won the Grammy Award of the Song of the Year in 1975, the last song to do so from a musical. Per Sondheim, "The success of 'Send in the Clowns' is still a mystery to me."

The Frogs, with which I was completely unfamiliar, is an experimental piece he was asked to write for the Yale Repertory Theater, "one of the most deeply unpleasant professional experiences I've ever had." The producer was one of the worst kind: "the academic amateur." But he admits "it offered me a chance to harangue an audience, to use a chorus a cappella to make sound effects, to write massed choral music, and to indulge in vulgarity, adolescent humor and moral preachment, just like Aristophanes."

With his Pacific Overtures Sondheim moved to a new level in his fusion of music and lyric, using the structure of Haiku poetry in his lyrics, his dedication to the principle that "less is more." I've never seen Pacific Overtures although Ann had when it first opened on Broadway and when I asked her what she thought, she said that at the time it was so different from anything else she had seen, she didn't know what to think other than she knew it was a work of genius.

It is all part of Sondheim's quest to "finish the hat." In this musical Sondheim has the opportunity, however, to "thumb his nose" at Gilbert (of Gilbert and Sullivan) with a piece from the show "Please Hello": As he said, "I...would like to point out with suitable pride that the lyric is historically accurate as an account not only of the succession of arrivals but of the specifics of each country's demands. The music, unsurprisingly, is a series of pastiches: Sousa march, Gilbert and Sullivan patter, Dutch clog dance, Russian dirge and French can-can. In the interests of thumbing my nose at Gilbert, I summoned up a meticulous series of inner rhymes without distorting syntax, syntax distortion being a feature excused by his fans as part of his style, but something which I deplore, as I deplore it in Hart, Gershwin and Coward."

Ann & I were at a dinner party and we were talking about Sondheim's next work in the book, Sweeny Todd, and I was surprised by their unanimous abhorrence of the musical. Although I understand an aversion to some of the gruesome scenes, I think they were simply not getting it, lyrics and music perfectly synchronized, one existing for the other. Perhaps it is because unlike the classic musicals of Rodgers and Hammerstein, some Sondheim musicals do not let you merrily exit afterwards humming the melodies. But Sondheim haunts and certainly his love of suspense music, the macabre, and his less than sympathetic view of mankind (Rodgers and Hammerstein's musicals always ending on an uplifting note in spite of any darkness that might inhabit part of their musicals), comes through in Sweeny Todd, off-putting to the audience in its graphic violence, "blood" even spurting as far as the orchestra pit in some performances. How can an audience which loves an Rodgers and Hammerstein's buoyantly optimistic "There's a bright golden haze on the meadow" reconcile itself to Sondheim's bleak "There's a hole in the world / Like a great black pit / And it's filled with people / Who are filled with shit"?

Sondheim describes the work as a "dark operetta" and really a "movie set for a stage" so it is no wonder that Tim Burton's translation of the musical to screen starring Johnny Depp and Helena Bonham Carter is considered (by Sondheim) to be the most successful adaptation of one of his works for the silver screen. The movie is remarkable as neither Depp or Carter had ever sung before. Singing Sondheim is difficult enough for trained singers as his lyrics come fast and furious in many songs with few spells for breathing. In fact, the DVD edition of the movie is the perfect way to see Sweeny Todd, turning on English subtitles, sort of like reading the libretto of an opera while the performance is underway. It's the best method of fully appreciating what Sondheim accomplishes with this and his other opera-like musicals.

Finishing the Hat concludes with his Merrily We Roll Along, which reminds me a little of Company, as it is a contemporary urban piece, also about friendships, and somewhat autobiographical as it concerns a songwriter. ("In my heyday as a young songwriter, I played many requests at many parties through the short attention span of the requesters and suffered many opinions of producers and directors who felt that their credentials demanded that they have something critical to say.") Although there are memorable pieces in the musical, it closed after only a handful of performances, but with subsequent revivals, Sondheim tweaked it over the years.

The time line of the play is in reverse as our songwriter (Frank) devolves from being a rich Hollywood type to his beginnings on Broadway. It has one of my favorite Sondheim songs, "Not a Day Goes By" sung with two different meanings, first as Frank's final plea of love when his wife wants to divorce him and then in a reprise as a love song on their wedding day. Because of the reverse time line, it is the complete opposite of the usual reprise (think of Rodgers and Hammerstein's "People Will Say We're in Love" or "If I Loved You").

"Not a Day Goes By" is one of the many pieces I regularly perform by Sondheim. Although his music is best appreciated with his lyrics, that song reminds me of the other wonderfu,l frequently melodic, pieces by him that I enjoy playing as piano solos. True, there are others that do not work as solos, but I think Sondheim gets a bad rap for not being melodic. As I play mostly from "fake books" (which provide melody and chords and it is left to the pianist to improvise everything else) I have limited choices of Sondheim pieces. Still, there are many in my repertoire. Sondheim confesses a penchant for "list songs" (as do many other lyricists, think again of Rodgers and Hammerstein's "My Favorite Things" from Sound of Music which we just saw brilliantly performed at the Maltz Jupiter Theatre) and so, I am concluding with my own list, those Sondheim songs that I like to perform, all from The Ultimate Broadway Fake Book .....

Anyone Can Whistle (Anyone Can Whistle)
Being Alive (Company)
Broadway Baby (Follies)
Company (Company)
Good Thing Going (Merrily We Roll Along)
I'm Still Here (Follies)
In Buddy's Eyes (Follies)
Johanna (Sweeny Todd)
Little Night Music (Little Night Music)
The Little Things We Do Together (Company)
Losing My Mind (Follies)
Not a Day Goes By (Merrily We Roll Along)
Not While I'm Around (Sweeny Todd)
Pretty Women (Sweeny Todd)
Remember? (Little Night Music)
Send in the Clowns (Little Night Music)
Side By Side By Side (Company)
Someone is Waiting (Company)
Sorry-Grateful (Company)
Waiting for the Girls Upstairs (Follies)
Who's That Woman? (Follies)
You Could Drive A Person Crazy (Company)

American Dream Diminished

Owning a home was once a cornerstone of the American Dream. Go to school, work hard, get married, buy a home with a mortgage, have children, try to give them better opportunities than you had, work hard some more to pay off the mortgage, retire and do the things you couldn't do while you were working. It all sounds prosaic now, even old fashioned, but I suppose if I had to describe my life in a few words, that description would be a rough outline. Lucky for me, I loved my work so I never thought a moment about following just about the same blueprint as did my parents.

They were children of the Great Depression and after the war, the urge to own a home was overwhelming, a symbol of financial security and success. Levittown became the poster child for postwar suburbs throughout the country, and upon my father's return from WWII, they immediately bought their first house, around the corner from my grandparents' home, and blocks from my other grandparents, in Richmond Hill (borough of Queens in NYC). I think they paid less than $5,000 (this is 1946 mind you) and we lived there until I was 13 when we moved to a larger home, in a "better section" of the same community. Both homes still stand today, remarkably unchanged as these photos from Google Street Views attest. Those were the only homes they owned during their entire lifetimes.

By comparison, our home-owning has been more prolific (and equally remarkable, our past homes have been renovated to such a degree they are now nearly unrecognizable). After renting apartments in Brooklyn and the upper West Side of Manhattan, we finally ultimately moved to Connecticut where I was then working, first renting a small house in Westport, and then finally buying our first home which was almost across the street from where we were renting. It was 1971, the beginning of a steady increase in real estate prices and by 1974 we sold that first home and moved into a larger one in neighboring Weston where we lived for the next 22 years and raised our family.

The 1990s saw a moderation of real estate prices -- even a decline in some areas. It was the time of the savings and loan crisis, but with our children out on their own or off to college, our two acre home in Weston seemed unnecessary and we wanted a home in a "neighborhood" and by the water, so we sold and bought a 100 year old cape on the Norwalk River in East Norwalk. We thought that might be our home for the rest of our lives but, unexpectedly, my working life was at its end four years later and that is when we decided to move to Florida, the fourth home we've owned and, who knows, perhaps our last.

But, someplace along the way, the American Dream of home owning has become an American Nightmare. Foreclosures and the federal takeover of Fannie Mae and Freddie Mac are just ongoing symptoms of the developing crisis that has stemmed from the housing bubble of 2000-2007, mortgages being eagerly issued by banks with zero down to less than credit-worthy buyers, or to those in the "business" of flipping homes for profit, these loans condoned or even mandated by government. This activity and Wall Street's eagerness to cash in by taking inappropriate subprime loans and rolling them into exotic collateralized mortgage obligations, "rated" AAA by another accomplice in this crime against the American Dream, the rating agencies, conning investors into thinking they were getting a "guaranteed" return on a "riskless" investment, fueled the fire.

Also complicit is the Federal Reserve. By addressing the crisis with "Quantitative Easing" the Federal Reserve has postponed the day of reckoning. By Federal Reserve Chairman Ben Bernanke's own admission in a November 2010 Washington Post opinion piece, it is the "wealth effect" of past QE's that has contributed to the stock market's recovery, saying "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." This Fed induced bubble simply accelerates the "boom bust cycle," one that may end ugly when 'the can' can no longer be kicked down the road.

We all see the macro effects of QE, the rise in speculative investments, animal spirits being drawn out by low interest rates, a surge in commodity prices (of which there are relatively fixed amounts in relation to monetary creation out of thin air) but the gorilla in the room is our state and local governments. There has been a sudden flood of articles about their failing finances; a Google search will unleash an avalanche of them and I've written about this before as well.

In a nutshell, our state and local governments have promised too much in their pension obligations and now that the revenue tide is running against them with lower property tax revenues from falling real estate prices and foreclosures, not to mention their poor fiscal habit of financing certain projects with the assumption there will always be the opportunity to roll over debt with more debt in the future, the homeowner finds himself in the crosshairs. The cavalry of the Federal Reserve which rode to the rescue of banks and AIG has decided to leave municipalities and homeowners to their own devices, Bernanke saying "we have no expectation or intention to get involved in state and local finance. [States] should not expect loans from the Fed."

Consequently, it is now a vicious cycle, lower property values begetting a smaller pie for municipalities, which results in millage increases being levied by local taxing authorities, which in turn results in still lower property values. Being a homeowner today leaves one obligated to share in the past profligacy and poor planning of one's local government. Many would have difficulty selling their homes at any price to escape this obligation, turning the American dream of home owning into a nightmare.

Pelican on a Piling

It might be the silliest and saddest looking bird we regularly see in South Florida, seen resting here on a piling of our dock this morning, but the Pelican has a certain beauty, especially when it cruises only feet above the water, suddenly climbs and then dives into the water, tucking its wings at the last moment to turn its inelegant body almost into an arrow, taking a fish into its beak.

Dawn Rises on a Fresh Snow

As much as I generally do not miss the winters in the Northeast, there is that magical time when the snow is still pristine and the stillness of the dawn arrives, that a certain majesty of nature's creation is in evidence. Luckily, sites like WestportNow.com capture such moments in their photographs, and here is an exceptional one they posted today of Westport's Compo Beach (CT).

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Senseless to the Sublime

The last two nights make me think of Franz Kafka's The Hunger Artist, in which a famous fasting artist is on display in a circus menagerie, the crowds pushing past him to get to watch the lions stalk and feed. "He immediately got an earful from the shouting of the two steadily increasing groups, the ones who wanted to take their time looking at the hunger artist, not with any understanding but on a whim or from mere defiance—for him these ones were soon the more painful—and a second group of people whose only demand was to go straight to the animal stalls." It is a highly symbolic story of how artists sacrifice themselves for their art and the general public's ignorance of what great artistry demands and preference for sensational pursuits.

One of the reasons we live in this area of Florida is for the cultural diversity it has to offer. True, it does not have the advantages of a London or a New York in its breadth or consistently high quality, but knowing where to go can uncover some wonderful cultural events. Case in point, our favorite small theatre where we never miss a production, Palm Beach Dramaworks. But the largest theatre in the area is West Palm Beach's Kravis Center for the Performing Arts and we've seen some fine musical revivals there over the last several years, South Pacific standing out in my mind, and some special programs such as when Sondheim visited for an evening discussion of his works.
Admittedly, it was with some trepidation that we got tickets for the Kravis’ production of Beauty and the Beast but Ann had tried to see the Broadway version, liked some of the music, and never could get tickets so we were hoping that this touring production would at least be on par. Tuesday night we saw the opening and it was so dreadful that we left at intermission. This review gives some of the details although it is actually very restrained in its criticism.


It is a Disney dumb-down production presumably for the kiddies, with one dimensional slapstick characters, but, amazingly, most of the adult audience seemed to be laughing at the childish humor which at best rose to the level of a sitcom. The fact that a Beauty and the Beast could flourish for so long on the Great White Way says much about the public's taste in musicals. We should have known better!

The following evening we sought redemption, having long ago booked tickets for a series we have followed for years, Keyboard Conversations ® with Jeffrey Siegel at The Society of the Four Arts in Palm Beach. These are "unique concert-plus-commentary format in which he speaks to the audience about the music before performing each work" in their entirety. Wednesday night was one of the most demanding programs we've ever heard this highly-acclaimed American pianist perform, tackling three of the most difficult pieces written for the piano by Johann Sebastian Bach (Chromatic Fantasia and Fugue, BWV 903), Samuel Barber (Fugue from Piano Sonata, Op. 26), and Ludwig Van Beethoven (Sonata No. 23 in F minor, Op. 57 --- the "Appassionata). Mr. Siegel playfully calls the program "Three Great B's Bach, Beethoven and Barber" (the latter B normally reserved for Brahms, but this is the 100th birthday celebration of Barber, one of America's leading composers, a contemporary of Bernstein and Copeland). In addition he played two of Barber's "Excursions" which I had never heard and reminded me so much of some of Gershwin and Copeland.

The physicality of the performance was astounding. As I play the piano myself, I have a special appreciation for what Siegel accomplished last night, performing the entire program without sheet music, keeping up with the tremendous technical demands of these pieces. Indeed at the end of the night, when he conducted his traditional audience question and answer portion of the program, he seemed, justifiably, physically spent, perhaps like the artist in Kafka's story. But this audience was brought to a standing ovation in appreciation.


Antidote du jour.......

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We're On a Crazy Carousel

The passage of still another year reminds me of Jacquel Brel's brilliant waltz from the late 1960's musical review: Jacques Brel Is Alive and Well and Living in Paris. It is a song that begins slowly, sanely, gathering tempo as it culminates breathlessly at the end. I was playing that song during the anticlimax of Y2K.

We're on a carousel / A crazy carousel / And now we go around / Again we go around / And now we spin around / We're high above the ground / And down again around / And up again around / So high above the ground / We feel we've got to yell / We're on a carousel / A crazy carousel

My "blogger friend" Mark over at Fund My Mutual Fund, whom I've referenced before in these virtual pages, has been writing, strategizing, constantly working towards the goal of starting his own mutual fund. He is pursuing the golden ring on this carousel of life, following his dream, and this year he will finally realize it. His New Year's message revealed many of the details that led to this culminating moment and I applaud him for his tenacity.

Decades earlier, like Mark, I followed my own dream, carving out a niche in the publishing world, one that fascinates me to this day, but at one time in my life I had considered a career change and perhaps if the Internet existed then, I might have followed a different path. It wasn't that I had a falling out with my interest in publishing, but I too had become enamored by "the markets" and fancied myself an "investor."

My interest started out by investing in some of the Nifty Fifty ( many of which crashed and burned under their own overvalued weight in the poor economic, high inflationary years of the 1970's), and then with the help of VisiCalc (the precursor of Lotus 1-2-3, in turn the precursor of Excel) and my first computer (an Apple II), came up with what I thought was a "bullet proof" system of investing in convertible debentures. I even marketed a VisiCalc template ("Converticalc") to analyze them. Well, as we all sooner or later recognize, there is no infallible system, and making investing an avocation can be as dangerous as being your own surgeon, so now I rely on people like Mark and, I am not ashamed to admit (in this era of "fast money"), I'm also a buy-and-holder, investing in selected dividend aristocrats selling at reasonable price/earnings to growth ratios. But Mark's New Year's message reminds me that things might have turned out differently if I followed my other dream to its logical conclusion.

The program drew interest at the time and there was even some discussion with a major brokerage house about starting a mutual fund based on it. By today's computer standards the program is laughable, but mind you this was nearly thirty years ago. A new publication, Financial & Investment Software Review, which was dedicated to "microcomputerized investing" carried my article on investing in "converts" in its Summer, 1983 issue. I wish I could just give a link to the article, but I have to paste it below in its entity as it doesn't exist anywhere on the Web. Actually, the concepts haven't changed that much -- as far as straight investing in Convertibles is concerned -- but the nature of these instruments have changed with the advent of computer driven arbitrage. They are not for the faint of heart.

So, this is now water under the proverbial bridge for me, but things could have turned out differently if my interest in investing finally outweighed my passion for the publishing business. Follow your dream in 2011 and watch for the launch of Mark's "Paladin Long-Short Fund."

Evaluating Convertible Debentures by Robert Hagelstein (Financial & Investment Software Review, Summer, 1983, Volume 1, No. 3)

Convertible debentures are an unusual investment opportunity but largely have been overlooked because of the complexities in evaluating them and because of the relative illiquidity of the marketplace. During the last several years, however, convertible debentures have been issued by a growing number of companies and in larger numbers, significantly improving their liquidity. This factor, in combination with the widespread availability of the microcomputer for analysis, makes convertible debentures suitable for most portfolios. Much of the following discussion of convertibles has been adapted from the manual that accompanies CONVERTICALC , a VISICALC® template that was developed for the evaluation of convertible debentures.

Convertible debentures are debt instruments that are convertible into common stock. They share the most attractive aspects of both kinds of investments, the appreciation prospects of equity with the high current income of a bond. In addition, the debt characteristic of the convertible creates an investment floor, a point at which the convertible will not decline, even if, theoretically, the common declines to nearly no value (assuming bankruptcy is not the cause of the decline).

Despite the focus on convertible debentures in this article, there are also convertible preferred issues that may be of interest to the investor. A drawback to this convertible security is preferred stock has no maturity date at which time one can expect to receive par value for the investment. Nonetheless, many of the evaluation techniques discussed below can be applied to these convertibles should the investor wish to include such issues in an investment portfolio.

Corporations issue convertible bonds as an inexpensive means of raising capital. In effect, a convertible offering is an equity offering in the future, allowing the corporation to issue a debt instrument with a coupon rate much lower than prevailing rates. Until recently, convertibles were mostly the exclusive province of corporations with lower debt ratings. Persistent high interest rates have changed this; even Kodak and IBM have issued or filed to issue convertible securities.

There are several publications that follow convertible debentures, each providing essential information needed to evaluate them: the number of shares into which each debenture is convertible (the "conversion ratio"), the coupon and maturity date, the quality rating as a debt issue, the amount of debentures outstanding, and the identification of the issuer and the issue into which it is convertible (some are convertible into the common stock of companies other that that of the issuer). These publications include Standard & Poor's Bond Guide, Moody's Bond Record, and the Value Line Convertibles Service. They also provide some of the computations used to analyze convertibles, particularly Value Line.

SOFTWARE PROGRAM
CONVERTICALC not only gives the critical formulas for evaluating convertibles, but it also provides the data on approximately one-hundred of the most actively traded issues on the NYSE and AMEX exchanges. The user can add or substitute other issues, replicating the evaluation formulas.

Nevertheless, there is no computer program that can forecast the direction of security prices. There are a host of intangibles affecting investors' perceptions of value, many of these relating to investor psychology rather than to fundamental values. CONVERTICALC is intended to be an investment aid and does not offer any prescribed buy/sell decisions, It endeavors to supply information to evaluate convertible debentures in relation to one another and in relation to the underlying common stock.

As convertible debentures can be exchanged into the underlying common stock, at the option of the holder, the appreciation prospects of the common is crucial to evaluating its corresponding convertible, Traders convinced that the common will move substantially higher within a short period of time, are normally better off buying the common than the convertible. Longer term investors, particularly conservative ones to whom current income is important, may find the convertible to be the better choice. In both cases, however, the first step in making a buy decision is determining whether the common stock is desirable.

Convertibles selling at a large discount from par may be especially attractive to long-term investors. Such issues enable one to "lock" into a virtually guaranteed capital gain, even if the underlying common stock should fail to appreciate during the period. Another consideration is the convertible's bid and asked price. This spread will normally be small for issues actively traded on the NYSE or AMEX. It can be considerable for issues with a relatively small float and for those traded over-the-counter.

Most convertible are "callable" by the issuer, requiring the holder to either sell at the call price or convert into common stock. It is not unusual for convertibles to be called once the issue is selling at substantially more than par. Usually, convertibles are callable at prices higher than par during the first few years after issuance, declining to par as the date of maturity approaches. Many are callable at par long before maturity. For this reason Moody's Bond Record is an invaluable companion for investors considering buying convertibles: current call terms are specified.

CONVERSION PREMIUM
A key element in evaluating convertibles is the issue's "conversion premium." This premium represents the percentage at which the convertible is selling over its "conversion value" (the number of shares into which one debenture is convertible multiplied by the current price of the common stock). The lower the premium, the more likely the convertible will move in relation to the underlying common stock while the higher the premium the more likely the convertible will move in relation to interest rates. Convertibles with low premiums, having relatively high yields and fast "payback" periods (see below), are generally the best buys (if, of course, the common stock merits a buy). Such convertibles will appreciate with the common stock and provide greater yields than the common stock, giving the investor the best of two worlds: capital gains and lower downside risk.

As the conversion premium is intrinsic to evaluating convertible values, the CONVERTICALC disk includes a section sorted by conversion premium. Generally, those convertibles carrying premiums of less than 5% will follow nearly all of the underlying common stock's rise. However, some of these same issues may be equally vulnerable to a substantial decline of the common while others may follow only half the common's decline. The potential magnitude of a convertible's downside risk relates to its yield in relation to those paid by non-convertibles of similar quality. Obviously, convertibles with yields to maturity approaching those prevailing for straight debt issues that would decline the least even if the underlying common stock should decline (see the discussion of the "investment premium" below).

It is possible to quantify the potential price relationship between an underlying common stock and a convertible debenture, plotting what is known as the "convertible curve" on a x/y axis graph. An awareness, however, of a convertible's conversion and investment premiums generally obviates the need to maintain such graphs.
Then, there is the concept of "payback period," the amount of time it will take to recover the conversion premium from the additional yield provided by the convertible over the common stock, This is important when considering whether one buys the convertible or the underlying common, When a convertible has a relatively long payback period and the premium is not excessive the common stock yields nearly the same as the convertible. If the dividend is relatively secure, the common stock may be a better value than the convertible,

INVESTMENT PREMIUM
The concept of "investment premium" can be as important to one's investment decision as the conversion premium, The former represents the percentage a convertible debenture is selling above its investment value (as if it is devoid of its convertibility feature). In order to ascertain this percentage, it is necessary to identify the debt quality of the convertible being considered. Access to Moody's or Standard & Poor's bond publications will provide a bond rating for the issue, For this reason, it is necessary for the investor to know the yield to maturity of the convertible being considered. Even if the investor is not looking for high current yield, yield to maturity is the basis for comparing convertible to straight bonds, CONVERTICALC provides an approximate yield to maturity calculation.

Quantifying the investment premium is a method of judging the potential "floor" for the price of a convertible, a means of establishing the magnitude of the investment risk, A convertible with virtually no investment premium is selling at its investment value. Such issues are more likely to be more sensitive to changes in interest rates than movement of the underlying common stock This is also a characteristic of convertibles with high conversion premiums. Therefore, generally, the investment premium and the conversion premium will tend to be the reciprocal of the other, high investment premiums following low conversion premiums and vice versa, Sometimes one can find convertibles with relatively low investment AND conversion premiums, These are the undervalued issues that should be sought by the investor; they have nearly the same upside potential as the common stock with very little downside risk if the common stock should decline (assuming static interest rates).

The investment premium may be quantified by using a hand-held calculator or the remaining memory available on the VISICALC matrix. After the bond rating for the convertible issue being evaluated has been ascertained, and the prevailing yield for equivalent non-convertible debt issues has been established, a bond table would reveal at what price the convertible would have to sell to yield the prevailing rate. Then, by subtracting the current price from the price at which it would have to sell to yield the prevailing rate and dividing the remainder by the current price, the investment premium can be calculated. Common sense can generally substitute for an actual calculation. In comparing a number of convertibles chosen on the basis of relatively low conversion premiums, ones of roughly the same investment grade, those with the highest yields to maturity have the lowest investment premiums.

Convertibles should not only be analyzed against one another and against the underlying common stock; they should also be evaluated against themselves over a period of time. Maintaining a file on a regular basis and recording changes in the key convertible evaluation components - conversion premium, yield, and payback period - enables the investor to "plot" bands of values. Market volatility, earnings growth, interest rate movements will profoundly affect these statistics. By observing these movements as computed by CONVERTICALC, the investor can decide when the common is overpriced in relation to the convertible or vice versa. One may want to sell a convertible whose conversion and investment premiums have become too excessive and switch into one with lower premiums and/or a higher yield. By observing diligent portfolio management the investor can maximize return and minimize risk.
"Evaluating Convertible Debentures" © 1983 by Robert Hagelstein. CONVERTICALC, is a VISICALC® template formatted for 64 K APPLE II® DOS 3.3. APPLE® is a registered trademark of Apple Computer, Inc. VISICALC® is a registered trademark of VISICORP''.

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