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Don't Miss Out on the World's Best Income StreamBy
Wednesday, July 11, 2012
This month, some investors are going to miss out on one of the world's safest, best income streams... all because of Stockton, California.
Stockton is all over the national news right now. Last month, it became the largest U.S. city to declare bankruptcy. Stockton will default on the loans it accepted from investors. The city plans to cut government employee jobs and benefits.
"All that's left is sadness," said Stockton local Gary Gillis, to the L.A. Times. "Stockton has the most good, solid, down-to-earth people you'll ever meet. And now things are going to get even harder for many of them."
Stockton's crisis is fanning the flames of the same warnings municipal bond investors have heard for years now. And a week after Stockton filed for bankruptcy, Mammoth Lakes, California filed for bankruptcy protection. But if you can focus on facts, instead of hype, you'll realize you can still make terrific amounts of tax-free income in municipal bonds.
There's a growing worry that municipalities are showing signs of trouble. And several are struggling to balance the books as required each year – like Stockton.
This will NOT HAPPEN.
Here are the facts...
As you may know, municipal bonds are loans made to state and municipal governments. To encourage folks to invest in the government, interest received from "munis" is exempt from federal income tax... and, in many cases, state and local income taxes. These bonds are one of the great friends to the income-seeking retiree... tax-free and safe.
Remember... the municipal bond market is huge... It's over $3 trillion. So while Stockton is the largest city to declare bankruptcy – with over $500 million in debt – it won't do much, if any, harm to the whole muni market.
And although I'd expect a few more defaults this year, the numbers will still be miniscule – perhaps 0.5%-1% of the total municipal bond market. But many of the muni bonds are priced as if they're expecting 10%-14% default rates. To put that into perspective, in 2011, defaults totaled $2.8 billion... less than 1% of the total market. So even if defaults doubled (to $5.6 billion), that is still less than 1% of the market... and a long way away from 10%-14% the talking heads are yelling about.
Plus, even with defaults, the deals are worked out, sometimes people still get new terms that provide 80 to 90 cents on the original dollars. Don't let the graft and corruption of California's ugliest city scare you out of a great investment...
In fact, readers of my Retirement Millionaire newsletter have been ignoring the hype and fear while making money.
In April, I told DailyWealth readers about one of my favorite picks – the Invesco Insured Municipal Income Trust (IIM). It fell 13% when the credit-rating agency Moody's said the default rate for municipal bonds has doubled in the past two years relative to the average default rate from 1970 to 2009. The ratings agency also said it expects more local governments to default on bond payments.
At the time, I said this was a great opportunity to get into munis. And since then, IIM has risen almost 10%... in just three months.
However, right now, IIM is trading at about a 4% premium to its net asset value (NAV). I don't like to buy closed-end funds at more than their NAV, and IIM is getting ahead of itself. But I do have another muni fund in our portfolio that yields nearly 9% on a taxable equivalent basis. Plus, it's trading at exactly its NAV. I recently told my Retirement Millionaire subscribers this is a "strong buy." I expect this bond to pay us 5%-6% a year in tax-free income for the next several years.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Further Reading:
Last August, low interest rates had "driven money out of traditional savings vehicles and into stocks and corporate bonds." This sent muni bonds up, including one of Doc's favored one-click funds... If you listened to his recommendation then, you'd be up 16% today. Get the full story here: If You're Looking For Safe Investment Income, Buy This Now.
But muni bonds aren't the only investing opportunity Doc's interested in. Over the last year, he's told DailyWealth readers about "chaos hedges," the best inflation-beating stocks, and a way to earn 10%-20% annual gains.
Market NotesWYNDHAM IS STILL SOARING... AND THAT'S IMPORTANT Despite the euro debt crisis... and despite weak job numbers, Wyndham Worldwide continues to surge. And that's important...
This year, we've featured many charts that display how the U.S. economy, while not "great," can't be doing "all that bad." For example, we've noted the solid price strength in Home Depot and transportation stocks. We've also cited the strong price action in hotels.
The profits and share prices of hotel operators rise and fall with America's ability and desire to take business trips and vacations. Thus, they are excellent "real world" economic indicators. And Wyndham is about as "real world" as it gets.
Wyndham (NYSE: WYN) is one of the most important stocks you've never heard of. It's the world's largest hotel operator. Brands here include Super 8, Howard Johnson, Ramada, and Days Inn. Wyndham owns several "upscale" hotel chains as well.
As you can see from the two-year chart below, Wyndham is enjoying a huge uptrend. Just last week, shares struck a new all-time high. We look at this extraordinary strength and say, "Sure, there are problems with the U.S. economy... but if Wyndham is soaring, things can't be all that bad."
– Brian Hunt
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