These Tax-Free Bonds Are Still a Great Buy
By Dr. David Eifrig, editor, Retirement Millionaire
Thursday, June 18, 2009
"With an economy larger than Canada's or Brazil's, [it is] is too big to fail..."
Too big to fail. That's getting to be a weekly headline here in the States. The big economy in the quote above is the state of California's. In case you didn't realize, California by itself would make for the world's eighth-largest economy.
Things are crazy out there. The state faces a $24 billion budget shortfall... and big tax hikes ahead. Nevada, Florida, and Arizona are in the same shape.
You might think all this budget trouble means it's a bad time to loan money to these guys. But I'm actually urging readers of my Retirement Millionaire advisory to keep on loaning money to states – to keep buying "municipal bonds."
Understanding "muni bonds" is simple. In order to fund things like highway projects and water systems, states borrow money from individual investors. To entice folks to invest with the government, interest earned on these bonds is exempt from federal taxation.
That means if California's muni bonds are paying out 6%-7% in interest payments, it's the equivalent of getting a 9%-10% yield on any other kind of interest-bearing investment. You also have the extraordinary power of the government looking out for you. The alternative to you not getting paid is for the state or city to go bankrupt.
Right now, though, investors are scared of muni bonds. You see, back in 1975 and 1978, New York City and Cleveland defaulted on their debt. People are worried that's going to happen again.
But folks are missing a big thing here: If Washington D.C. isn't going to let GM, AIG, or Citibank go belly-up, do you really think they'll let a big state go bankrupt? I'm not in favor of any bailout, but that's the game we're playing.
My favorite way to own muni bonds is through "closed-end funds." These investment vehicles aren't like regular mutual funds... They can trade for premiums and discounts when investor sentiment gets out of whack. Oftentimes, you can use closed-end funds to buy a dollar's worth of assets for 85 or 90 cents.
And that's where the opportunity is today: closed-end muni-bond funds that are trading for much less than their "net asset value." Right now, we can buy several closed-end California municipal funds for as cheap as 84 cents for every dollar of assets.
Consider the last two times the markets did this. In 1995, you could buy $1 of muni bonds for 85 cents. And in 1999, a dollar's worth of these bonds cost 86 cents. The chart below of MCA (a BlackRock fund of California munis) shows these extremes. Every time the gray line dropped below the black one, you could buy munis at a discount.
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Buying Munis at a Discount Leads to Big Gains
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As you can see, buying when the fund traded at a discount led to capital gains within a couple years. Not to mention the tax-free income along the way.
The state of California is in trouble. The price (low) and yields (high) of its municipal bonds show it. But you can be sure Obama and the current federal government will not let the state slide into the ocean and default on its obligations to investors. This provides us with an incredible opportunity to buy high-yielding discounted municipal paper.
A lot of closed-end funds own nothing but California bonds, including MCA. If you're a real contrarian, consider buying these. Many are going for double-digit discounts.
If you want a safer bet, take a look at more diversified funds that own bonds issued by many different states.
Bottom line: Don't get scared out of these tax-advantaged bonds. They're still a good source of income at arm's reach from the taxman.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
P.S. I've actually found more than a dozen great ways to get tons of extra income for retirement, often without even investing any money. For example, there's one program that gives retired homeowners lots of extra money – without making any investment. There's also an "extra-income" program for retirees who have regular insurance policies. The point is, if you need more money for retirement, you should definitely have a look at the research I've done. Read more on all of these programs here. |
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THE EASY MONEY HAS BEEN MADE IN OIL
It didn't take long for our extreme gold/oil ratio reading to correct itself.
In late December, we recommended turning bullish on crude oil. Crude was ridiculously cheap relative to its commodity cousin, gold. We measured the cheapness with the gold/oil ratio.
The gold/oil ratio is the amount of crude oil one ounce of gold will buy. If gold is $800 an ounce and oil is $80 per barrel, the ratio is 10. If gold is $800 and oil is $40, the ratio is 20. When the ratio dips below 10, gold is cheap relative to crude oil, and it's a safe bet gold will outperform oil over the following year. When the ratio climbs above 20, the opposite is true... crude oil is cheap.
In December, the ratio reached an extreme reading of 24. We compared it to a teapot set on a hot burner. It was only a matter of time before the pressure was released and big gains in crude followed.
Crude has doubled since then. Gold has moved sideways. And as you can see, the teapot is off the boil. The ratio is a more normal 13... and the easy, early money has been made.
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Detroit's last Chrysler Jeep store closed last week. Soon, it'll start selling small pickup trucks made in India.
Retailers continue to abandon Detroit. You can't find a Borders bookstore in Detroit. Only four Starbucks are left. Since A&P and Kroger left in 2007, no national grocery chains operate stores in the city.
The landscape is post-apocalyptic. Hundreds of buildings are left vacant. A million people have fled the city.
Everybody, including the sometimes-clueless Wall Street Journal, says it's because the auto industry has collapsed. That's true to an extent, but the real truth is it's entrepreneurial suicide to open a business in a political hellhole like Detroit.
Thirty percent of Detroit residents are on food stamps, and 22.8% of them are unemployed. The only thriving retailer: Family Dollar Store has opened 23 locations here since 2003.
Cut way back on the food-stamp program and unemployment insurance, then eliminate the barriers to starting and growing a business that exist in every city in America, and Detroit could give New York a run for its money some day.
– Dan Ferris,
in the S&A Digest
Applications have surged at the nation's three top military academies as tough economic times coincide with stepped-up recruiting efforts by the Army, Navy and Air Force schools, making the prospect of free college and a steady job look sweeter.
As of this week, the U.S. Naval Academy was out in front with a 40 percent increase in applications compared with last year. Annapolis received about 15,300 applications for about 1,230 positions – the highest number of applications the academy has received since 1988.
– Newsmax
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Monday, June 15, 2009
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Saturday, June 13, 2009
A Government Boondoggle that Can Save You Thousands on Your Taxes
Friday, June 12, 2009 |
"Why I hate to hear the Star Spangled Banner and refuse to say the pledge"
American war veteran tells a sad story of what's happening
in the world.
I remember a time when I would threaten a person for not respecting our flag and loving our country. "Love it or leave it," I used to say; "these colors don't run" was another one. I loved my country and thought it loved me back. |
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