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Pocketing Cash from those Oblivious California Fools

By Dr. Steve Sjuggerud
Wednesday, October 7, 2009

Greetings from sunny California... one of my favorite places to visit, but a place I'll never call home.

I choose to live in Florida. Florida has no state income tax. And in my hometown, you can still park your car at any beach or on Main Street without feeding a meter. Not in California. And with California's current financial situation, it can never go back.

That's why I won't move to California. I know it'll cost me...

California's state income tax is among the highest in the country. And it is likely going higher... No wonder more people are moving out of the state than moving in. Property prices have crashed (so government revenues from property taxes have crashed). California's public schools rank among the worst. Unemployment is at record highs. The list goes on.

Instead of working on these problems, California's politicians are "balancing" their massive budget deficit by "using accounting tricks that couldn't fool a grade-schooler," according to legendary bond-fund manager Bill Gross. California has created questionable "IOUs" at a faster rate than your typical Latin American dictator. And California has the worst credit rating of any state.

In short, California is broke. It's no secret. But somehow, California's politicians are in complete denial. To solve its problems, California needs massive government spending cuts (ha!) and massive tax hikes (just try to pass those).

If California is in such trouble, who would do something as foolish as loaning California money? Well, I did... In January of this year, I recommended you buy California government bonds.

We were actually making a safe bet. I figured the U.S. government wouldn't let California fall apart. And the bonds were paying very high yields for government bonds – tax free.

Back then, investors were scared. The best opportunities often appear during times of fear. So I recommended a way to profit from "those oblivious fools."

Today, I recommend you pocket your profits from that trade...

Back in January, I recommended the PIMCO California Intermediate-Term Bond Fund. The total return since I recommended it has been about 10%. That might not sound exciting, but a double-digit return in less than a year in boring municipal bonds is exceptional. Even better, a decent portion of that gain – all the income – is tax free!

But now, the trade is over. Here's why:

In short, the "free" money is behind us. Investors are not nearly as scared as they once were. The reward in California municipal bonds is no longer worth the small risk.

California tax-free bonds only pay about 1% interest above the national average for state tax-free bonds. The thing is, California is essentially bankrupt. Other states (while struggling) aren't.

As recently as June, the "spread" between California bonds and the other states was more like two percentage points. The current spread around one percentage point isn't worth it...

So take that double-digit profit and move it to higher ground. My favorite place to move that money and keep it tax free is the PowerShares Insured National Municipal Bond Fund. The symbol is PZA.

The tax-free yield is about 4.5%. You'd have to earn 6% in a taxable account to equal 4% tax-free.

I love California. But I don't want leave my investment dollars in the hands of California's government, not for such a tiny return. Pocket your cash from those oblivious politicians. Take the 10%. And move it to higher ground, in something like PZA.

Good investing,


P.S. I really do love it here in California... I'll be here less than 48 hours, but I have a packed schedule. I'm visiting my good friend Van Simmons, who is a mentor of mine and one of the most knowledgeable people on the planet about making money gold coins and in collectibles.

I plan on catching up with young investment analyst Mebane Faber (he'll be famous someday I believe). I'll also go surfing with the most famous big-wave surfer of all time... Laird Hamilton. My kind of trip!

Market Notes


In case you've been under a rock for the past 24 hours, the buyers just won the "battle for $1,000 gold."

During yesterday's trading, gold reached $1,043 ounce... which surpasses its March 2008 high. So what's really driving this breakout? Once again, we remind you "There ain't no such thing as a free lunch."

You see, to pay for all sorts of bailouts, wars, stimulus packages, cash for clunkers, and welfare programs, governments have to borrow lots of money. They even create a little out of thin air to help foot the bill. When they do this, they dilute the value of their paper currencies. Gold, a sort of "anti-currency," is where smart investors flock when this government stupidity gets a little too stupid.

Is gold too popular right now? Probably. But governments know that promising "bailouts for everyone" is how to get elected and stay elected. And as old man gold and his new high reminds us, there just ain't no such thing as a free lunch. Long-term, gold is headed higher.

The gold ETF: Powering to a new high

In The Daily Crux

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