And state governments are feeling the pinch. According to the National Conference of State Legislators, there are only three states (Arkansas, Wyoming, and North Dakota) that do not face budget shortfalls for fiscal years 2009 or 2010. In other words, 47 states are currently projected to run short on cash in the near future.

And California – the world’s eighth largest economy – is in the worst shape of all. Currently, the state has committed to spend $26.3 billion beyond what it takes in. Controller John Chiang estimates that the state has enough cash to last through July. To avoid defaulting on debt payments, California will issue more than $3 billion of IOUs this month.

But while the plan may buy some time, it will only make the situation worse. The big banks (Bank of America -NYSE:BAC-, Citi -NYSE:C-, Wells Fargo -NYSE:WFC-, JP MorganChase -NYSE:JPM- and others) have stated that they will not cash the IOUs after July 10th. On a side note, this likely means that the banks are either so short on liquidity that they can’t afford to do so, or they are not confident that the state will honor its commitments when the IOUs mature in October.

That means that the state’s contractors and vendors must either hold these IOUs until they mature, sell them at a discount in the secondary market (listings are already popping up on Ebay and Craigslist) or, for smaller denominations, take the hit at a check cashing store.

Many of these contractors are already strapped for funds to pay their employees and subcontractors and can ill afford the disruption in cash flow. Undoubtedly, this will cause a cascading domino effect of layoffs, defaults and business closures. This will depress tax revenues even more, while increasing the demands for government services.

And it is not just contractors and vendors taking a hit. Local governments are also receiving IOUs for the state’s financial obligations. That could force some local governments to default on their municipal bond payments.

But this is not what constitutes the greatest threat to municipal bondholders nationwide. That threat comes from the federal government.

You see, state governments are not permitted to run budget deficits. Unlike the federal government, state governments are required by law to balance their budgets each year. And they can’t just print money like the federal government does (California’s quasi-legal IOUs notwithstanding).

That means the states must either cut services, raise taxes, or both. Neither alternative is easy to get through the legislature. In the case of California, Schwarzenegger recently declared that tax increases are “politically impossible.” And yet the alternatives include slashing spending on health care and education and releasing inmates from prison.

Political difficulties aside, California and just about every other state will be cutting services. And you can guarantee that just about every tax you pay will be going up in the future. But the states will also be putting increasing pressure on Washington for handouts. If there was money for the banks and the car companies, certainly there must be something for the states, right?

So far, Washington has rebuffed California’s calls for bailout money. The aid they have issued has come in the form of stimulus, such as increases in Medicaid and education funding. But the stimulus is obviously not working, and it’s not just California that is in trouble.

Corina Eckl, Director of National Conference of State Legislators, recently wrote, “The state fiscal situation is rapidly deteriorating and the figures for fiscal year 2009 and fiscal year 2010 have moved from sobering to distressing”. She compares the situation to a bad horror movie, where the “details get more gruesome, and the story never seems to end.”

As the cries for help become more urgent, the possibility grows that Washington will come to the aid of California and other states facing serious shortfalls. But don’t think for a moment that this assistance will come without strings. And one of these “strings” could well be the elimination of the tax exemption on interest payments from municipal bonds. In fact, the Obama administration has already pushed us over that slippery slope.

The interest payments on state and local bonds for public projects have always been exempt from federal taxes. But since the FDR administration, various presidents and legislators have tried to remove this exemption.

Given the “tax the rich” mentality in government, and the fact that nearly 50% of tax-exempt bond income is claimed by households earning over $500,000, it’s no wonder that efforts to roll back the exemption have grown stronger. And the “extenuating circumstances” of the current financial crisis have provided just the cover that was needed.

As part of the “American Recovery and Reinvestment Act of 2009” state and local governments are now authorized to issue taxable “Build America Bonds” to finance projects for which they could otherwise issue tax-exempt government bonds.

State and local governments that issue these bonds would “receive a federal subsidy payment for a portion of their borrowing costs on Build America Bonds equal to 35% of the total coupon interest paid to investors.”

And because there was no hearing on these bonds, there was no opposition. Investment manager, Richard Shaw of QMV Group, calls this the proverbial “camel’s nose under the tent.” Before long, the entire beast is sleeping right beside you. It was enough for Bloomberg to state that, “Barack Obama may be the worst thing that ever happened to tax-exempt bonds…”

Now, you might be saying that issuing new taxable municipal bonds is a far cry from re-writing the rules on existing bonds. And I would say the same thing, if it were not for what happened recently to bondholders of Chrysler and General Motors.

In both cases, once the government got involved the contractual rights of capital were superseded by the “greater good of society” – a blatant violation of contractual law and more than a thousand years of common law. Chrysler bondholders were denied first priority in liquidation. And GM bondholders were shafted in favor of the union.

I am not saying the rules will be re-written for municipals. But I wouldn’t rule it out either. If the federal government intervenes in state finances, you can be sure there will be strings attached. And one of them could involve an assault on tax-exempt income.

Quoting Richard Shaw again: “If the federal government steps in to provide ‘exceptional assistance’ to California or any other state, it would be imprudent to deny the possibility of the rights of bondholders being subordinated to the ‘greater good.’”

Considering the tenuous state of state and local finances, the risk of default on municipal bonds is almost certain to increase. Add to that the outside potential for a change in tax status and caution is advised. If you own municipal bonds, diversification is paramount. And stick to general obligation bonds, which are backed by the full taxing power of the issuing jurisdiction.

And don’t forget, banks and Property & Casualty insurance companies own about 25% of all municipal bonds. So, if the municipal bond market takes a hit, these sectors will suffer the consequences. Invest accordingly.

P.S. My colleague, Steve McDonald, runs an exceptional service called, The Bond Trader. His focus is on high quality, investment grade corporate bonds. According to Moody’s the long-term default rates on these bonds are less than 1%. And because Steve only recommends bonds trading at a discount, he has led his subscribers to capital gains as high as 84%, combined with super-safe income.

Since September, 59 out of 62 of Steve’s recommendations have increased in value… two are breakeven and only one is down. Compare that to the stock market and you might wonder why you’re taking such a big risk in stocks. Learn more about The Bond Trader here.

Source: Will the Feds Use the California Crisis to Change the Rules on Munis?

• Buy them through Vanguard if you are a mutual fund investor. (The average fund company charges expenses six times higher than Vanguard’s.)
• If you are a closed-end investor, try a tax-free fund like Nuveen Insured Municipal Opportunity Fund (NYSE: NIO) trading at a 10% discount to its net asset value and yielding over 6% paid monthly.
• Or, to avoid annual expenses and have the certainty of a final value on a particular date, buy individual tax-free bonds.

But, whatever you do, buy them – now.

Tax-Free Bonds: Why It’s Time To Buy Them

So, why is now the time to buy tax-free bonds? Let me count the ways:

• Ten-year municipal bonds, while down from the historic premium they reached a few months ago, are yielding as much as 10-year Treasuries. Treasuries are taxable. Munis are not.
• Most municipal bonds are safe. Yes, a few areas – particularly in California and Alabama – are troubled. But the historical default rate on municipal bonds is just 0.3%.
• Taxes will soon be going higher. A lot higher.

Yes, I know that President Obama, when he was candidate Obama, promised a tax cut for 95% of Americans. But that was then and this is now…

In the meantime, we’ve seen the federal government:

• Ride to the rescue of General Motors and Chrysler…
• Pass a massive $787 billion economic stimulus…
• Spend hundreds of billions more to recapitalize banks…
• Bail out insurance companies…
• And “fix” the mortgage market.

Now the Obama administration is:

• Proposing the biggest changes to the health care system since the advent of Medicare in 1966.
• Planning to spend billions more to lighten our dependence on foreign oil and reduce carbon emissions.
• Now urging policy makers to rewrite the rules governing the entire U.S. financial system, spending who knows how many billions more.

As for candidate Obama’s promised tax cut, I’m reminded of the remark former Clinton aide George Stephanopolous once made to Larry King, “The President kept all the promises he intended to keep.”

The Consequences of Federal Spending & Encroachment

The consequences of all this new federal spending and encroachment into the private sector won’t be fully apparent for years to come.

But the wild fiscal imbalance is already crystal clear. Washington politicians will soon demand that you sacrifice even more of your paycheck so that they won’t have to sacrifice the near erotic charge – and high incumbency rate – they get from spending it.

This is ironic when you consider that to a large extent it was government that landed us where we are today.

Sure, the mortgage boom and housing market bust was due in part to shameless lenders, greedy borrowers, and unscrupulous Wall Street types. But who set the stage for them?

• Who took short-term rates to the cellar, creating a massive incentive for consumers and investors to borrow?
• Who gave real estate investors a $500,000 tax exemption on their profits from flipping houses every two years?
• Who passed laws criminalizing banks’ failure to lend to subprime borrowers?
• Who set up quasi-government institutions Fannie (NYSE:FNM) and Freddie (NYSE:FRE) – or, as I prefer, Phoney and Fraudy – to warehouse those bad mortgages, leaving taxpayers to pick up the tab?

The answer? The federal government.

As The Free Market System “Fails”…

And what will we get as a result of this supposed “failure” of the free market system? More federal government.

I’m not sure whether to laugh or cry. But I am sure our Founding Fathers must be spinning in their graves.

• Thomas Jefferson said, “That government is best which governs least.”
• George Washington said, “Government is not reason, it is not eloquence, it is force.”

No wonder polls show that more than 60% of Americans are skeptical of increased government intervention in the economy.

They suddenly recognize that we’re in for a lot more government, a lot more “market failure”… and a lot more taxes.

Sadly, there isn’t much you can do about it… except buy munis now.

Good investing

Alexander Green

Source: Tax-Free Bonds: Why Now is the Time to Buy Munis

But those same investors are starting to unleash a landslide of cash into the markets. According to the April, 2009 Merrill Lynch Survey of Fund Managers, optimism about global economic growth has reached its highest level since 2004, prompting investors to lower their aversion to risk.

The percentage of investors who are overweight in cash in their accounts fell to 28% in April from 41% in March. That’s a significant drop, and it represents a lot of cash being put to work elsewhere.

Those numbers make sense, according to AMG Data. The $3.7 trillion money market fund sector experienced cash outflows of $35.5 billion in February, $51.15 billion in March, $18.7 billion in April and $15.2 billion so far in May.

Why? Investors’ aversion to risk is waning, and they are beginning to feel comfortable again putting money into riskier investments. So where’s all this cash going? That depends somewhat on whom you ask, but the short answer is just about every place it came out of last fall, including municipal bonds.

Gary Baker, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research, recently remarked, “Improving sentiment on financials has decisively removed the log jam on sector rotation, prompting a march out of defensives into cyclicals.”

And it’s just getting started, according to Michael Hartnett – Gary Baker’s partner at BOA: “It’s important to note that asset-allocators are still underweight equities, indicating they have yet to fully embrace the idea of a new bull market.”

One place they are embracing the bull market idea, however, is China, where investor bullishness is at a six-year high: “Investors looking to play the global recovery are using China and other emerging markets, rather than Europe or Japan, to do so,” Harnett said.

Opening the Financing Floodgates Into Municipal Bonds

Perhaps the most interesting place money appears to be flooding into is one area that sorely needs it: the municipal bond market.

In the midst of the financial crisis in the fourth quarter of last year, money was drained from the muni -bond market – and the 1,728 mutual fund share classes that invest in them. Investors pulled out $9.42 billion and market losses slashed another $$42.3 billion from the sector.

That was a tough time for many state and local governments, who rely heavily on municipal bonds to finance many large capital-intensive projects like schools, water and sewer plants, and hospitals.

Jed McCarthy, managing member of 1861 Capital Management, said, “People forgot ‘munis’ were safe credits.”

Well their memories have apparently returned: Investors are shoveling money back into municipal bonds at record rates – to the tune of $1.73 billion per week – according to AMG Data.

As a result, the muni market is appreciating once again, regaining $23.4 billion so far in 2009. Great news for investors and governments alike.

Newfound Interest In Municipal Bonds Has Staying Power

This newfound interest in municipal bonds will likely have staying power. The reason? Investors – many of whom were burned big time in the stock market last year – are looking to reinvest, but want a safer alternative than stocks.

They’re not ready for a full-on charge into equities just yet…

They are finding it in municipal bonds. Right now, 30-year munis (according to the Municipal Market Date-Line yield curve) offer a tax-exempt yield of 5.19%. This translates into an equivalent taxable yield of 8.5% (assuming Obama’s proposed top tax bracket of 39%).

As far as municipal bond funds go, there are literally hundreds of them. You can buy funds that contain bonds from nearly every state in the union, and most brokerages offer general, closed-end municipal bond funds as well.

iShares S&P National Municipal Bond Fund ETF (NYSE: MUB) and the SPDR Barclays Capital Municipal Bond ETF (NYSE: TFI) are two good ways to cover the entire space.

Check out www.municipalbonds.com for everything you need to know to get started investing in municipal bonds. But don’t wait for a market correction. We’re already in it.

Good investing,

David Fessler

Source: Municipal Bonds: Two Muni-Bond Fund Investment Opportunities

This from Sovereign Society:

With yields as high on municipal debt as they’ve been in years and the President-elect’s office all abuzz with news of stimulus for state and municipal governments, the cunning investor is paying attention. The bailout of the financial system is already leading to some serious opportunities in commercial debt, so should you get ahead of the curve and dive into municipal debt?

In a word; no. At least not yet.

After all, big government curing our economic woes with “stimulus” projects is almost like a drug dealer curing withdrawal symptoms with more heroin…you just can’t help but wonder whether his medicine is exactly what got you there in the first place. Regardless, we’ll indulge popular thinking and acknowledge the fact that the government is now prepared to throw piles of free money at this sector of the economy.

But hold on just a second…what’s that percolating in D.C.? US$1trillion won’t do the trick, they say. Everyone from Bernanke to Riksbank-prize-winning economist Paul Krugman say that we’ll need more… possibly US$2trillion, or even more than that. And Obama has certainly indicated that he’d be open to that kind of discussion.

Now, let’s glaze over the fact that I could personally put another man on the moon – and probably Jupiter – with that kind of loot. And while we’re at it, we’ll glaze over the potential US$3trillion in government spending in 2009 (more than any government has spent in a single year since humans started governing).

No, let’s be professional about this, and in the words of Ricky Roma from Glengarry Glen Ross, “You never open your mouth until you know what the shot is.” So let’s figure out the shot…

Bloated State & Local Governments…

In the period between 1960 and 2000, the Federal Government went from two million total employees to three million. This difference didn’t even track the total growth in population over that period. But in that same period, state and municipal governments went from six million total employees all the way up to 20 million.

And since then, the situation hasn’t really improved. When the “War on Terror” terrified us into giving up a greater portion of our personal liberties for the promise of “security,” these payrolls ballooned again.

Think about it in practical terms; when was the last time you went to the DMV or the county courthouse? There were at least a handful of TSA-style security guards to frisk and scan you…since everyone’s a terrorist until proven innocent these days…who do you suppose pays their bills?

Why you do! And you also pay for another 20 million more state & local employees who rely on over US$74 billion in your annual taxes to keep a roof over their heads. But you have to remember; these outfits aren’t run with the trademark efficiency of business titans like IBM or Microsoft.

Instead – as you can see from the chart at the left – they constantly waffle back and forth from periods of excess savings to periods of excess debt (note that the Census data for this chart ended in 2007…when our crisis was just beginning and state & local governments held a collective savings rate of -10%!)

Sovereign Society Investment Director Eric Roseman chimes in, “The growing funding concerns facing municipalities has already spread to several states, including California, which requires cash to finance a massive budget gap in 2009. California, with a long string of budget deficits has declared a State of Emergency in December as the state runs out of cash. California is the largest issuer of muni debt.”

“What’s truly alarming about December’s scrapped Port Authority offering was the short duration of the fixed-income term of only three years. Investors would typically embrace a short-term note that pays a tax-free yield. But these are not normal times.”

“The rating agencies have also confused investors since the market has lost confidence in their ability to accurately rate and rank credit offerings.”

“As the U.S. economic recession deepens into 2009 it would be advisable to avoid tax-exempt municipal bonds, despite their attractive yields. The risk is too high. You’ve got to believe that many more cities, towns and states will suffer from a credit squeeze coupled by a lack of buyers as revenues continue to decline in a deteriorating economy. Avoid muni bonds.”

Source: When a Trillion Dollars Just Won’t Do…

The world’s gold market’s were closed on January 1st, but once early morning trading began on January 2nd in the Far East, the price spike in gold was killed immediately…and it became obvious that someone (JPMorgan -NYSE:JPM-, perhaps?) didn’t want gold to rise and confirm that bullish technical indicator I just spoke of, so it was taken down with some authority…as was silver. This lasted until about 1:00 p.m. in Hong Kong, when both metals began to recover somewhat…but the selling pressure showed up again as soon as London opened, and continued that way, with both metals on the defensive when New York opened. Gold was not allowed in positive territory for the rest of the N.Y. trading session, but silver was allowed to tack on about 40 cents. Both metals would have done better yesterday, but it was obvious that someone didn’t want runaway prices to the upside during London or New York…which is what would have happened if the moonshot open in gold that began in early Tuesday morning Globex trading had been allowed to run its natural course.

In Tuesday’s trading, gold open interest rose another 2,142 contracts to 300,448…with silver open interest actually declining 441 contracts to 85,312 contracts. New Year’s eve’s (Wednesday) open interest changes on the big spike showed an open interest increase in gold of a largish 6,203 contracts to 306,651. Silver o.i. rose 611 contracts to 85,923 contracts. It will be of great interest to see what Friday’s open interest figures are like once they become available on Monday morning.

The other item of interest on Monday will be the latest Commitment of Traders report. It will be interesting to see what the CFTC uses for a cut-off date. But regardless of which day they pick…neither Wednesday’s nor Friday’s dramatic action in gold and silver will be in that one. We’ll have to wait four more days until next Friday to see who went long and who sold short these last couple of trading days.

In gold news, the usual N.Y. commentator was not pleased (nor was I) about Indian imports of gold for December and all of 2008…”Yesterday the Bombay Bullion Association announced that India’s December bullion imports dropped 81% from last year to 3 tonnes…and that the full year’s imports were only 402 tonnes, down 47% from 2007’s 759 tonnes.” Equally disappointing was Turkish demand in December…a miniscule 227 kilos. His closing comment was the following…”The rally appears to be fuelled entirely by Western speculative sentiment, which can be very powerful. But with such a weak base in physical demand, it is likely to be short lived.” We’ll see. And lastly, I see that the GLD ETF (NYSE:GLD) added another 150,000 ounces on December 29th to a new record high total of 780 tonnes…if you believe that they actually have all the gold they say they do, that is. Oops…one more thing…”Apex Silver Mines (AMEX:SIL) Limited has received a delisting notice from the NYSE.” If you’re wondering why…just take a look at their hedge book…and the current zinc price.

In other news: an aljazeera.net story where the headline read…”Russia cuts gas supply to Ukraine”…”Russia’s state gas monopoly Gazprom has cut all gas supplies to Ukraine after talks over payments owing and 2009 prices failed.” In a Bloomberg story, a sure sign that there’s big trouble in the municipal bond market is the fact that Pimco is postponing dividend payment on a pair of closed-end municipal bond funds. (Here’s another case where investors should be more concerned about a return of their investment, rather than a return on their investment. – Ed) In a cnn.com story I see that five Democratic governors have asked Uncle Sam for a cool $1 Trillion in aid to the country’s 50 states for various and sundry things. And from The King Report…”2008 will be a year of historic imfamy. The S&P 500 declined 38.5%, the biggest drop since 1937. The Dow Jones Industrial Average declined 34%, the largest drop since 1931. It’s highly unlikely that 2009 will be as ugly. But this does not suggest that it will be a ‘good’ year. ”

Today’s first story is about the man behind the printing presses in Zimbabwe. If you read his bio, he’s obviously not the sharpest knife in the drawer. But what the story does show, is how tyranny can keep a country in fear. The story from the L.A. Times is entitled “Zimbabwe’s Money Man Plans to Keep on Printing”…and the link is here.

The next story is from forbes.com. It’s columnist Dan Gerstein’s last offering of the year, and he lets it all hang out. It’s entitled “Dangerous Thoughts: The Most Distrusted Institution in America”. The link is here.

In the next story, British savers are about to find themselves in the same boat as their American counterparts…0% interest on their accounts. The story is from telegraph.co.uk in London where the headline reads “Savers facing accounts with no interest”…and the link is here.

Lastly is the latest from James Turk over at goldmoney.com. His commentaries are always happy reading…and this one is no different…as he discusses the enviable record that the US$ gold price has racked up. The story is entitled “Gold Climbs Again – Eight Years in a Row” and the link is here.

I need to confess that I have no idea where the S&P500 will be in a year’s time. But given the catastrophic economic conditions we find ourselves in, I’m convinced that governments around the world will increase the intensity with which they will be attempt to save the world with monetary and fiscal measures. As pointed out in last month’s report, this will increase volatility and should be ‘gold friendly’. – Marc Faber

Today’s ‘blast from the past’ is from the 1970s. I hadn’t heard this song in ages until I dug it up on the Internet about two weeks ago. It’s got a great driving beat…and I hope you enjoy it…so turn up your speakers and then click here.

Despite the big day on the US equity markets yesterday, nothing has fundamentally changed. How long this ‘rally’ lasts remains to be seen. But when the economic, financial or monetary systems cough up their next hairball, we’re going to see another nasty turn to the downside…and gold will be the only show in town…just like it’s been for the last eight years in a row.

Source: And Then There’s This…Monday, January 05th, 2009

This

I’ll be the first to concede the going’s tough. That almost every “time-tested” strategy that worked well in bull markets is sputtering and collapsing.

But is it so bad we’ve given up on turning a profit? And just resigned ourselves to preserving our principal, right?

WRONG.

This week the Treasury sold $32 billion in 4-week bills at a yield of ZERO percent.

That’s not a typo. Investors actually clamored for the opportunity to lend the government their money in return for absolutely no return. In fact, investors bid $126 billion at the auction, more than four times the amount available.

As Michael Franzese, the head of government bond trading at Standard Chartered explains, “I have never seen this before… It’s all about capital preservation for the turn of the year, not capital appreciation.”

Forget unbelievable. It’s idiotic. What investors are essentially saying is that absolutely no better opportunity exists in the market right now – that survival is their paramount goal of investing, not profiting. But ignore what the lemmings are doing. Their folly is creating endless (and historic) opportunities for us to increase our wealth. Of course, simply telling you that will not suffice…

6 Market Investment Opportunities Right Now

Let me share with you a short-list of market investment opportunities I’m researching and taking advantage of on a daily basis. If nothing else, it should make you think twice before you follow the $32 billion worth of stupid money…

• International Stocks: Forget decoupling. It was a farce. The United States caught a cold… and international markets caught pneumonia. The offshoot? International markets are the cheapest on the planet – despite much stronger growth prospects than in the United States. For instance, the average Russian stock trades for just three times earnings! South Africa and Brazil are the next cheapest at six and seven times, respectively. An easy way to capture upside here is to rebalance your portfolio by adding money to your diversified international funds or investments. One of my favorite options here is the Templeton Emerging Markets Fund (NYSE:EMF), run by the best international manager around, Mark Mobius.
• “Free” Stocks: Hundreds of stocks trade below their cash balances, making them essentially free. Some will of course, burn through that cash faster than my wife on a shopping spree. So we can’t buy blindly. But that’s not the case for all of these stocks. One compelling opportunity I recently presented to my subscribers is Immersion Corp. (Nasdaq:IMMR) – a leader in haptic technology. Forget cash on hand, its patent portfolio is worth more than the current stock price.
• Income: Dividend yields rest at 15-year highs. Of course, not all dividend-paying stocks are created equal. Many will slash or suspend payments just to survive the downturn. But others won’t. The master limited partnership (MLP) space is rife with opportunity. Investors seem to forget these companies aren’t impacted by the price of oil and gas. They just get paid to transport it. The price of oil might be off 70%, but demand is not. My favorite play here is Kinder Morgan Energy (NYSE:KMP). It just increased its dividend and currently offers investors an attractive 8.7% yield.
• Munis: We all know there are NO guarantees in investing. But I can guarantee taxes are going up. How else will the government fund the billions upon billions in new spending? Especially, at a time when tax receipts will plummet. Thanks to a drop in corporate profits and the loss of 1.2 million taxpayers to unemployment. No surprise, the herd is piling out of munis ($7.4 billion so far this quarter) at exactly the wrong time. Their folly is creating attractive tax-free income yields and upside for us. For instance, the Vanguard Intermediate Tax Exempt Fund (VWITX) currently sports a 4.25% yield. That’s tax free and equivalent to earning 6.5% (based on a 35% tax bracket).
• Real Estate: Pricing remains completely irrational for real estate investment trusts (REITs). Some closed-end funds are off as much as 90%. Dirt is cheap – but it isn’t that cheap. This is a once-in-a-lifetime rebound opportunity. If nothing else, capitalize on the unstoppable trend of homeowners converting into renters by considering an apartment like Equity Residential Properties (NYSE:EQR).
• Short selling: An economic recovery won’t save every company. Plenty will remain in the tank, or worse, end up on the courthouse steps. Yet, most investors overlook the simple strategy to profit from these collapses – selling short. But they shouldn’t. In these markets it’s one of the few strategies consistently booking winners. That’s why I’ve been using it for my subscribers. Just last week, we booked a 50% winner in The New York Times Company (NYSE:NYT), for example.

Remember this is just my short-list. The key takeaway is simple – investment opportunities abound.

Granted, we might have to work harder than normal to unearth them. But we certainly don’t have to resign ourselves to handing over our hard earned capital to the government for nothing in return. After all, that privilege is reserved for our tax dollars.

Source: 32 Billion Reasons The Average Investor Will Fail

This from the Sovereign Society:

Yesterday’s [Tuesday] spectacular 889 point rally for the Dow ranked as the sixth largest daily percentage gain in history for the world’s most widely followed benchmark. The Dow surged 10.9% on Tuesday and other international markets also followed suit with huge double-digit gains.

But again, don’t get too cocky thinking we’re at the cusp of a new bull market. It won’t happen. The economic backdrop does not portend profit recovery any time soon. Domestic consumption is still declining in the United States as Americans start saving again. A higher savings rate is bearish for earnings.

A big stock market recovery like Tuesday’s probably has many investors itching to get back into the market to recover losses – but that’s a major mistake if you’re unhedged.

Joining Ranks with the Great Depression

Yesterday’s price action joins the dubious list of other extraordinary Dow rallies in history. According to The Wall Street Journal, the Dow’s 889 point rise on Tuesday and its 936 point gain on October 13 are dwarfed by Great Depression rallies of similar magnitude.

Of the top 10 stock market rallies in history, seven occurred during the 1930s, one in October 1987 and two this month. Unfortunately for investors, Tuesday’s 889 point rally was preceded by a 15.3% gain in March 1933, a 14.9% surge in October 1931 and a 12.3% gain in October 1929. That’s not exactly in good company when it comes to impressive rallies.

Global stock markets; however, remain oversold and are likely to extend their first bear market rally since the Fed’s bailout of Bear Stearns in mid-March. All sentiment indicators I follow are extremely bearish, suggesting we’re going to see more gains, however short-lived. The VIX Index – which plunged 16% on Tuesday – is still heavily elevated at 67.

Don’t Jump the Gun

In my view there’s no point chasing this short-term bounce.

The Presidential elections next Tuesday might also provide a jolt to stocks as renewed investor confidence is celebrated once McCain is sent packing his bags. Yet any celebration is unlikely to last beyond several weeks because corporate earnings are still rapidly deteriorating and consensus estimates are too optimistic, meaning more downgrades are coming.

There’s also the big risk surrounding unsettled CDO and credit swaps. There’s about US$60 trillion worth of these things floating around the world. And you can bet that most counter-parties probably can’t honor more defaults should they occur. Credit derivatives need a clearing house and hopefully, they’ll get just that in 2009.

Meanwhile, the credit markets are slowly improving. LIBOR rates are coming off their highs and commercial paper is flowing again, courtesy of the Fed.

I think it’s a good time to nibble – not bite – at your favorite blue-chip stocks and non-Treasury bonds, including investment-grade corporate bonds, intermediate tax-free municipals and TIPs, or Treasury Inflation Protected Securities.

I’d also bet against Treasury’s because long-term yields look awfully low this morning at 4.2% compared to the monster level of Treasury issuance coming our way over the next 12-18 months.

Source: October 28 Up-Crash Joins 1930s Bear Market Action in the Record Books

Alex says tax-free municipal bonds are now yielding 140% of their Treasury equivalents. And as Barack Obama moves closer to winning the US election demand for these bonds should soar as high-income earners look to avoid the coming tax hikes.

Alex thinks this is a no-brainer. You can play this either through buying muni bonds directly, or via mutual and closed-end funds such as Nuveen Insured Municipal Opportunity Fund (NYSE: NIO).

This from Investment U:

Since the financial panic hit in earnest over the past two weeks, all sorts of interesting opportunities have developed with varying degrees of risk. Today I want to point out one that is so rare it is without precedent. I’m talking about the current yield on municipal bonds relative to Treasuries.

As you know, investors have flocked to Treasuries as a safe haven during the current economic storm. T-bills are yielding less than a half of one percent. Ten-year and 30-year Treasuries are yielding about 3.5% and 4% respectively.

Yet municipal bonds of 15-year and higher maturities are currently yielding more than 5%.

Why is that so unusual? Because the interest from municipal bonds is exempt from federal taxation. As a result, munis ordinarily offer yields at 90% of the level of Treasuries. Today they are yielding as much as 140% of Treasuries.

“Valuations have really gotten out of whack,” says Paul Breenan of Nuveen Investments, who manages more than $13 billion of municipal bond assets. “They’re at historic levels we’ve never seen before.”

2 Reasons To Buy Municipal Bonds Right Now

Besides the higher yields, there are two other reasons you should buy tax-free municipal bonds right now:

• One is that this month, Moody’s is about to begin rating municipal bonds the same way it rates corporate bonds. “There will be an uplifting of credit quality of many muni securities,” says Jim Colby, senior municipal strategist for fixed income at Van Eck Global. “Chances are that when Moody’s changes its ratings, you’ll get higher credit ratings and better prices.” Under the new system, many A-rated bonds will become AAA-rated. That will cause the price of those bonds to rise.
• The other reason to buy municipal bonds now is that it looks like Senator Obama will win the election next month. He has pledged to raise the top marginal tax rate. So it’s reasonable to expect a major uptick in the demand for tax-free bonds in the year ahead.

Why aren’t these investors swooping in to buy these bonds already? Some of them are. But a big source of muni buying is typically banks and insurance companies. Right now these companies are de-leveraging. Selling assets, in other words, not buying. This has pressured the market, creating the juicy tax-free yields we see today.

The Best Ways To Play The Municipal Bond Phenomenon

What are the best ways to play this unusual municipal bonds phenomenon?

• The first, of course, is to buy individual municipal bonds. If you own an individual bond, there are no annual expenses and you are assured of receiving $1,000 per bond at maturity. Pick your bonds depending on which state you live in. If you live in a high tax area like New York or California, for instance, you will definitely want to own your own state’s bonds to avoid both state and federal income taxes. Follow the link to get information on your state’s individual municipal bonds.
• Another way to own munis is through Vanguard mutual funds. Why Vanguard? Because it has the lowest expenses in the industry. (The average mutual fund company charges expenses six times as high as Vanguard.) It’s a simple equation: The lower your annual expenses, the greater your net returns. Follow the link for a complete menu of Vanguard tax-free municipal bonds.
• Yet another way to buy tax-free bonds is through a closed-end fund like Nuveen Insured Municipal Opportunity Fund (NYSE: NIO). This fund also holds a portfolio of tax-free bonds. The annual expense ratio is 1.15%. Although this is higher than Vanguard, it is actually cheap by closed-end fund standards. Many closed-end funds have expenses that total more than 2% per year. And NIO offers something that Vanguard cannot. You currently have the ability to buy this fund for 33% less than the net asset value. In other words, you can buy a dollar’s worth of assets for sixty-seven cents.

And you should. The deep discount is causing the fund to yield 7% tax-free. (If you’re in the top tax bracket, the taxable equivalent is over 10%.)

If the market price moves back to net asset value when things settle down, which is likely, you’ll have a 33% capital gain down the road as well.

The Risks of Buying Municipal Bonds

What are the risks of buying these municipal bonds? There are two mainly:

• The first is that all this government spending turns out to be inflationary and so bond yields rise. That would cause bond prices to decline, at least temporarily.
• Then there is the risk of default. But this is pretty negligible.  According to Moody’s, the 10-year default rate on all investment-grade bonds is 2.1%. For AAA-rated corporate debt it is 0.52%. The default rate for investment-grade municipal bonds is a scant 0.07%.

In short, these are three good ways to capitalize on the credit crisis that is gripping the nation.   They won’t last forever. So you ought to take advantage of them now.

Source: Municipal Bonds: A True Once-in-a-Lifetime Opportunity

Best of all, the STXAX costs an initial investment of only $500, with additional investments of $50.

That’s a cheap investment for a safe haven portfolio. The munibond fund has been up 4.9% over five years annualized…

Ann Sosnowski

Editor, Safe Haven Investor

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Source: Time to Buy Munibonds?

If You Think Obama Will Be President, Buy These Bonds

By Steve Sjuggerud

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…

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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!

Source: If You Think Obama Will Be President, Buy These Bonds