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It Sounds Crazy... But It's Time to Buy This Hated Asset

By Dr. Steve Sjuggerud
Wednesday, February 16, 2011

Are there any buys at all in the financial markets?
To make money, you want to buy fear. You want to buy when everyone believes the world is ending, like they did back in March 2009.
So are investors "deathly scared" of any particular asset now? For the most part, no... Fear is gone. Investors are wildly optimistic on just about every segment of the stock market.
But there is one sector out there where fear is as strong as it was back in March 2009... where there's not a single ray of light: municipal bonds.
Whether you realize it or not, you know "muni bonds"... Whenever you pay your toll on a state toll road, for example, you're paying interest on a municipal bond. To build the toll road, the state borrowed money by issuing muni bonds. It pays the investors who bought those municipal bonds with income generated from that toll road.
And Mom and Pop America are fleeing municipal bonds in droves...
Municipal bond mutual funds just had their 13th straight week of outflows... December was the worst month for municipal bond fund outflows in the 27 years the Investment Company Institute has kept such figures.
I hardly have to explain why... Municipal bonds are bonds issued by state and local governments ("municipalities"). And many state and local governments are upside down on their debts. It seems likes there's no hope.
Illinois is the poster child for the problem... Illinois Comptroller Dan Hynes told 60 Minutes recently that the state has $5 billion in outstanding bills. It's six months behind in payments... with hundreds of thousands of people waiting to get checks from the state. Hynes admitted, "The State of Illinois is a deadbeat state."
Famed stock market analyst Meredith Whitney appeared on the same show, predicting defaults in municipal bonds totaling hundreds of billions of dollars.
Dare we even consider buying these bonds?
Individual investors (often called the "Dumb Money") are selling muni bonds more than ever. But let's take a look at what the "Smart Money" is doing. Let's check in with these three guys:
  • The best-performing muni-bond fund manager over the last 10 years.
  • The best overall bond fund manager over the last 10 years.
  • The Bond King, possibly the best bond fund manager of all time.
Lyle Fitterer is the best muni-bond fund manager of the last decade, beating out 1,500 peers. This guy is BULLISH.
"I'm not saying there won't be defaults," he told Bloomberg last month. But "for every bad story there are hundreds of good ones... The baby has been thrown out with the bath water."
Fitterer is stepping up to the plate. According to Bloomberg, he added more general obligation bonds from Illinois and California to his fund.
What he says next is what reminds me of March 2009 in the stock market: "Fear is driving bondholders to sell at a time when valuations are most attractive."
Fitterer is the best muni bond fund manager of the last 10 years. The best bond fund manager of the last 10 years is Jeffrey Gundlach. In a TV interview this week, Gundlach said, "The time to buy municipal bonds will be when your hand is quivering to write the buy ticket... Because usually that's when you'll be most profitable."
Individual investors' hands are quivering now.
Bill Gross is the Bond King. He manages the world's biggest bond fund, the Pimco Total Return Fund. Yet even with its size, he has still managed to stay near the top of the heap in bond returns for decades.
On Bloomberg TV last month, Gross said, "I don't subscribe to the theory that there will be lots of [bankruptcies]." He said he is buying municipal bonds now. He's happy to earn yields that are not only much higher than Treasury bonds... but even higher than corporate bonds.
"There is some risk," he says. But "could or would a state default? Not really. The states are not going to default in Pimco's opinion."
Pimco's study of history backs up Gross' thoughts: "From 1970 to 2006, the default rate for munis has averaged 0.01% annually," Pimco says. In other words, only one out of 10,000 municipal bonds defaulted. And "even during the Great Depression, the average annual default rate was 1.8%, with 97% of the defaulted principal eventually recovered."
So one out of 50 bonds defaulted during the Great Depression. But investors recovered a full 97 cents on the dollar.
Right now, we have heightened fears in the market. The Dumb Money is selling municipal bonds at a 27-year-record rate. Meanwhile, the Smart Money – the three best guys to ask – are buying.
In a market like today's, where opportunities are hard to come by, a great opportunity – the most hated asset – is municipal bonds. As crazy as it sounds, it's March 2009-time in muni bonds... It's time to buy.
Good investing,

Further Reading:

Steve looks for three things in his investments: cheap, hated (or ignored), and in an uptrend. It's hard to find all three at once. But last June, he found Big Pharma fit the bill. (His pick is already up 13%.) And last July, he recommended blue-chip stocks like Exxon (up 44%), Chevron (up 37%), and Citigroup (up 20%).
His latest investment idea fits the cheap, ignored, and in an uptrend mold. "For cheap, we're at valuations 'never seen in the history of investing,'" Steve wrote. "And for ignored, the market is not far off of 25-year lows. The uptrend is there, too... Shares of my favorite way to play this idea bottomed in October 2008 and March 2009 and are now at three-year highs. And they're still cheap!"

Market Notes


Kudos to our colleague Dan Ferris. He's generating big gains for his readers on a great "bad to less bad" situation...
Back in October, Dan recommended mega medical technology firm Medtronic (MDT) to his income-focused 12% Letter readers. Medtronic dominates the U.S. pacemaker and spine-implant market. For years, the company has used its dominant position to become one of the world's great dividend-paying stocks. The company has increased its dividend every year for the last 32 years in a row. Few companies even come close to that claim.
Concerns over a slowing economy and the broad market correction helped slam MDT shares last summer. As you can see, things were bad for the stock. Soon after the decline, Dan pointed out this "dividend dominator" offered tremendous value... and a cheap way to own a steady and growing dividend stream.
These days, things are "less bad" for MDT. The short-term concerns have passed. Revenue is still flowing in. Dividends are still paid. And although Dan recommended MDT for its income stream, the "bad to less bad" phenomenon we often write about has meant a quick 12% capital gain. You can click here for a great deal on signing up for Dan's latest high-income recommendation.

Medtronic owners enjoy a fast

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