Chou Funds: 2010 Semi-Annual Report

NON-INVESTMENT GRADE AND INVESTMENT GRADE BONDS ARE NOW FULLY PRICED: Non-investment grade bonds have rallied tremendously from their lows in March 2009, and at current prices we believe they are close to fully priced. For example, three and a half years ago the spread between U.S. corporate high yield debt and U.S. treasuries was 311 basis points. Currently, it is about 696 basis points, down from its peak of over 1,900 basis points in December 2008. (Source: JP Morgan).

Similarly, we believe that investment grade bonds are now close to fully priced.

However, when compared to corporate bonds, U.S. treasuries are in bubble territory. In our opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are headed into a 1930s style depression. And if you believe that you should redeem all your Fund units.

In equities, we believe the financial, retail and pharmaceutical sectors are undervalued.

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An Interesting Way to Invest in Banks

Please note: the investment described below is the view of the writer and should not be seen as a recommendation.

One of the more interesting ways to invest in the better capitalized banks is through the stock warrants that were issued to the U.S. Treasury by the banks when they received funds under TARP. The stock warrants give the holder the right to buy the bank's stock at a specific price. When the banks repaid TARP funds to the U.S. Treasury, the U.S. Treasury either sold the stock warrants back to the banks or they auctioned them to the public.

So, what is so unique about these stock warrants?