Steve Sjuggerud's DailyWealth

Tison's Fiasco: Your Money's at Risk and You Don't Know It.

By Dr. Steve Sjuggerud
Saturday, March 13, 2010

I walked the streets of Tison's Landing yesterday...

I admired the incredible neighborhood center for the use of residents, complete with soccer fields and the largest, most fully stocked playgrounds for kids I've ever seen.

From the gaslamp-style streetlights to the manicured public gazebos, no expense was spared. The residents of the 680 homesites across 200-plus acres would no-doubt love it...

The thing is, there are no residents.

Tison's Landing, as I'll explain, highlights the hidden danger of investing in municipal bonds...

Municipal bonds are typically pitched to investors as "safe as money under your mattress." But as the Tison's Landing story will show... they're not safe right now.

Local governments ("municipalities") issue municipal bonds. The big attraction municipal bonds offer is tax-free interest. And they often serve a useful purpose. For example, your county can borrow money to build a toll road (through a municipal bond offering). When it does, it promises to pay back the lenders out of the road's tolls over the next decade or two. Simple.

A toll road makes sense... But does it make sense for a municipality to back a property developer? That's what's going on at Tison's Landing, and hundreds of other property developments like it in Florida.

The basic idea was, the property developer would raise money to put in all the infrastructure (utilities, roads, and so on) through a municipal bond. The investors in the municipal bond would first collect interest from the developer, and then the residents once houses were sold.

The problem in Tison's Landing is, the developer stopped paying interest. And there are no residents. So there's nobody to pay the interest on the municipal bonds...

The Lights Are On (Thanks to Municipal Bonds)
But Nobody's Home

The photo above tells the story. All the infrastructure is in at Tison's Landing... electricity, water, streetlights. You can even see one of those community "gazebos" in the background. The empty lots literally go back as far as the eye can see. If I turned around and took another picture, it would look the same. There are 680 lots in all.

Municipal bonds paid for all of this. But municipal bondholders are not collecting interest anymore.

Who holds these bonds? YOU DO.

Mutual funds and pension funds are the usual holders. So in your retirement account, you probably own a stake in Florida "dirt bonds" like those of Tison's Landing.

Fund managers are selling these bonds at a 70%-plus loss in principal value now. They'd rather take the loss than take over the property and wait for a rebound. But it's not the fund managers taking the loss... it is YOU... the investor.

"We're managers of municipal bonds, not real estate people," one fund manager told Bloomberg news earlier this week about his Tison's Landing bonds. "We thought about foreclosing but decided the risks were too great."

Explaining why he sold at a big loss, he said: "We can't just write checks for development costs... If you have a $10 million bond that someone offers $5 million for, there's value in cutting and running and re-investing that cash in a solid project."

In the latest issue of my True Wealth newsletter, I recommended selling our position in municipal bonds. Readers pocketed a 13% profit in 13 months. About half of that profit was in tax-free dividends.

Specifically, I told my readers: "Municipal bonds are no longer smart to hold. We don't know which town will explode next. And we don't want to be holding that town's bonds... especially to earn tiny rates of interest."

I recommend the same for you now... Many more municipalities will go bust. The tiny rate of tax-free interest you earn on municipal bonds today is not worth the hidden risks. You could have a portfolio full of Tison's Landings, and not even know it.

Don't be lured in by the tax-free interest rate. Stay away from municipal bonds.

Good investing,

Steve

Further Reading:

Muni bonds are polluted with Tison's Landing and similar projects. Other bond prices have run up so high, the income is hardly worth it. But one category of bond is still paying big cash yields, as high as 19%. Tom Dyson covered the situation here: How to Make 19% Dividends from Bonds.

Tom recently covered a couple other safe options for income-oriented investors. Whether we're headed for a recessionary deflation or a new inflationary boom, these companies will keep generating cash and paying larger dividends each year. Get the full story here: My Two Favorite Stocks for Generating Income in Today's Market.

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BEAR MARKET ACTION IN CHINA

The rest of the world is throwing a stock-market party. Everyone got an invitation... except China. This is the idea behind our chart of the week.

From the U.S. to Canada to Brazil, stock markets are either at or near yearly highs... and the pretty people on CNBC are ecstatic again. But as you can see from our one-year chart of the benchmark Shanghai Composite, Chinese stocks are struggling right now.

Those bearish on China would tell you this "rest of the world strong, China weak" development means serious trouble is ahead for China's overheating economy. Those bullish on China will say this market is simply taking a "breather."

Either way, keep an eye on this important index. Late last year, it made three attempts to best its August high (red arrows). Each one failed more miserably than the next. If it breaks the February low (blue arrow), we'll be trading on the bears' side.


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