If You Think Obama Will Be President, Buy These Bonds
By Dr. Steve Sjuggerud
July 3, 2008
In my 13-year investment career, I've found there's one thing you can always count on to stir up investment opportunities... the government.
For instance... back in 2002, we bought an investment I called "virtual banks" in my True Wealth advisory. These types of banks borrowed money at low rates, and lent it out at high rates through government-guaranteed loans. Leverage ensured they could pay us safe, double-digit dividends.
We held the position a little over three years, and made more than 50%... all because the government guarantees many of the mortgages in America.
And take gold...
Gold coins, gold stocks, and gold ETFs have all made terrific gains in the past few years. Much of the gain has come from the flight out of paper money and into real assets. People simply don't trust governments to manage their currencies...
Today, I'm going to tell you what could be the best government opportunity you'll hear about this year: Muni bonds.
Tax-free municipal bonds are more attractive than they've been in half a century, as I'll show. And if you think Barrack Obama will be elected, then they're even more attractive. Let me explain...
Municipal bonds are very simple to understand. When a state needs to build a new toll road, for example, it issues a municipal bond to get the money to build it.
The U.S. government gives investors an offer they can't refuse on municipal bonds... Investors don't have to pay income taxes on the interest they earn on their bonds. So when interest rates are 6%, then tax-free municipal bonds ought to pay about 4%.
That'd make them about "equal" for high-end taxpayers. Once you pay taxes on your 6% interest, you're left with about 4%. In essence, you're no better or worse off with 6% taxable interest or 4% tax-free interest.
But today, we have a crazy phenomenon... Tax-free municipal bonds pay more interest than taxable bonds.
It's true... Tax-free municipal bonds are paying about 4.6% tax-free.
Meanwhile 10-year Treasuries are paying closer to 4.2%, taxable. This makes no sense...
We've hardly ever seen this in history. And right now, the opportunity is as good as it's ever been. It could get even more attractive...
If Obama is elected, the biggest investment winner could be tax-free municipal bonds.
You see, without a doubt, Obama will be raising income taxes on high-income families. For example, if your income is $1 million, and he raises income taxes by five percentage points, that's an additional $50,000 in income tax you'll pay.
High-income families will have a huge incentive to find ways to get tax-free income. And they'll discover something many of them have never even looked at before: Municipal bonds... That'll drive prices up significantly higher.
Of course, as the prices of bonds soar, you'll have to pay taxes on those capital gains when you sell the bonds... but that means you made more money while collecting high returns tax-free. It's a good problem to have!
If you're interested in this idea, my advice is to find an ETF that bundles together a lot of individual muni bonds. Money manager Van Kampen has several good issues that do this for investors. Click to see a full list of Van Kampen's muni funds.
According to Van Kampen's website, you'd need to earn 8.8%-9.25% in a taxable account (at the highest tax rates) to equal what Van Kampen is paying out on several of its funds (around 5.7% tax-free). You can find other muni-bond funds by typing "municipal" into the search box at www.etfconnect.com. This is a great website for information on ETFs.
Where are you going to find a safe, taxable 8.8% to compete with 5.7% tax-free? I don't know... and it's my job to find these things. That tells me it's time to buy municipal bonds!
Good investing,
Steve
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WELL DONE, MERRILL! BUT YOU'RE A LITTLE LATE...
Truly shocking news from one of Wall Street's finest: General Motors is in trouble.
Yesterday, Merrill Lynch downgraded shares of America's largest automaker from buy to underperform. "Bankruptcy is not impossible," the bank said.
We're not in the business of heaping abuse on others... but we believe we're speaking for a big chunk of our readership when we say, "Give us a break, Merrill... You finally figured it out?"
Anyone who has read DailyWealth for a while has seen our colleague Porter Stansberry's spot-on public floggings of GM. To sum up Porter's "Letter from the Chairman," GM doesn't make enough money selling cars to pay its debts... or even its interest payments. The government may step in to rescue the company, but not until shareholders have been wiped out and sent away in tears.
As you can see from today's chart, Merrill's "underperform" rating has come far too late. If a slide from $40 to $10 is how a buy-rated stock behaves, we're curious to see how a sell performs.
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Manhattan apartment sales dropped the most for a second quarter since 1998 and unsold inventory approached an eight-year record, two signs prices may be poised to drop in the nation's most expensive urban housing market.
Sales fell 22 percent from a year earlier and inventory rose 31 percent to 6,869 units, New York-based real estate appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said in a report today.
While prices in New York City are holding up for now, buyers remain wary and apartments are taking longer to sell. The average time spent on the market rose 15 percent to 135 days, according to Miller Samuel. At the end of May, there were 7,320 housing units for sale in Manhattan, the second-highest number for the month since Miller began keeping records in 2001. |
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Here's a question I ask myself. Suppose the dollar goes into a real swoon. I mean supposing there's a real run on the dollar.
You own a house. In the face of a collapsing dollar, would you sell your house? Sell it for dollars? Remember, the dollar is just a fiat currency.
A dollar only possesses value because the US government by fiat mandates that the dollar is legal for payments of all debts. There's nothing intrinsic about the dollar bill that you have in your pocket.
The government says you can use your dollars to pay off all debts (and when you buy something you're indebted to the seller). If the US government did not exist, the dollar would be worth nothing, zip, nada. Not so with gold. |
– Richard Russell
Dow Theory Letters |
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