Inflation vs. Deflation 2

Deflation reared it's ugly head today:

The US auto industry has collapsed as shown by this chart courtesy of the New York Times via Russ Winter's Winter Watch:

Here's the market reaction:

GM: -15%

US Steel: -13%

Cleveland Cliffs: -17%

Camphania Vale Rio Doce: -5%

Oil? It's up to $144.

Here's the calendar: Last year, we had a deflationary scare in August. Then everyone was focused on inflation in November and December. That was followed by suprise rates cuts and everyone turned around to ponder deflation from Janruary through March. After the March lows, the market again switched fears and has now been cowering from the inflation monster for the past three months. It's about time that deflation came back, at least in the mind of the market. Today confirms that this is the new trend for the next couple of months or so.

So, I bought more bonds. I doubled my duration to 10 years. I was thinking about how to calculate this as leverage on the portfolio. I'm thinking that for lack of any better ideas, I could take a duration of 30 as a 100% position, and therefore a 10-year duration would be 33%. With a five bip move required to move the total portfolio 1%, I think this is a reasonable calculation considering the volatility of Treasuries.

With GM down to $10.00 (a 54-year low), and Merrill Lynch warning of Bankrupcy (GM Bankruptcy `Not Impossible,' Merrill Analyst Says), I've been thinking. It's the value lover in me hearing a little voice saying, "companies that survive difficult times do very well." So, I'm remembering a recommendation to buy GM senior bonds that trade in low dollar denominations on the stock exchange. The symbols I'm looking at are HGM, XGM, and GMS. I need to call Schwab for more info on these. The crucial data will be: yield, yield to maturity, payment schedule, seniority of notes, any callability or convertibility, callability or convertibility dates and triggers, and date of maturity.