Everyone has their favorites. It could be sunglasses, shoes, sweaters, or dresses, everyone has certain preferences for specific items, whether it be attire, brands, or bonds. With brands we love what we think makes us look and therefore feel best and it's the same with bonds. We buy what makes us feel secure with the best rate we can get. Personally when it comes to accessories, whether it be shoes or bags, Miu Miu is hands down my favorite. While this may not be for everyone, seeing as most women would choose Christian Loubouton or Manolo Blahnik for their favorite shoes, for years Miu Miu has been my favorite for their style and comfort. That being said, for the past couple years Guam has been my favorite bond. Below are the reasons why. While Guam may not be the style (bond) you're looking for due to various personal perferences (rating being the main one), we all walk in and carry our own favorites and this is as they say, what makes a croc er, horse race.
Guam is a territory of the United States. It was originally part of Spain, when the US won it over in 1898. It remained a US Territory until 1941 when shortly after Pearl Harbor, Japan took it over for a little longer than 2 years that was a devastating time for the people living there. In 1944 the US took it back over and it has remained a US territory ever since. Due to it's dramatic history, a Guam general obligation is rated B+ (recently upgraded from B). The highest rated type of Guam bond is their Power Revenue bonds which are rated Ba1 by Moodys and BBB- by S&P.
Guam's main source of income is tourism from people living in Japan that use it as a vacation spot similarly to how people in the US visit Hawaii. It's second largest source of income is from the US Government. Recently the amount of money the United States is putting into Guam has really jumped. The Japanese civilians have grown tired of our marine bases in Okinawa seeing as there have been numerous incidents of servicemen committing crimes. So our entire marine base that is in Okinawa is now moving to Guam. That being said, there is a lot of constuction creating housing for the servicemen moving there. The government has also put a huge amount of money into the Ports in Guam. Over the past year it's no secret that US employment has taken a nose dive. This is true for everywhere except Guam. Guam is currently hiring in case anyone is looking for a climate change. As far as the Guam Airport is concerned, money goes directly from the US Government to the Guam Airport seeing as it is currently the only way on and off the island. Aside from all the constuction that has been taking place along with the funds going to Guam, it's location is such an important place for the US to be right now. It is the closest base we have on US soil to China and the Middle East. The more our world becomes a global community, the more important it will be for the US to have easy access to our neighbors.
If you are a conservative buyer I would not suggest Guam. It's rating will probably bother you. But if you are looking for a good buy and the facts make sense to you as oppose to the bonds rating (which doesn't make much sense to me) it's a bond to take advantage of. It's almost like getting a great pair of Miu Miu shoes at an outlet; just because someone else didn't want them doesn't mean that they wouldn't be great for you! The fact that someone else didn't want the shoes (bonds) makes the price just about as pretty as what you're buying!
Monday, December 21, 2009
Monday, December 7, 2009
Impostors!
This weekend I went on a 'walk' which is recession code for shopping these days and I came across this beautiful sweater that was 75% off. I immediately grabbed it and tried it on and was going to buy it when as I was carrying it to the register, I noticed a hole in it. Of course I put said sweater back and kept 'walking'. This got me thinking though, what if I had bought the sweater and then realized that it had a hole in it when I got home? I would have been screwed. This can actually happen with bonds as well. Below is a list of flawed bonds with descriptions of why these securities belong on Canal Street as opposed to in your portfolio.
COPs : Certificates of Participation (COPs) are bonds that can be brought into the market without a vote. When you're dealing with a regular municipal bond, for the issuer to bring the bonds onto the market, individuals vote on the issue and if enough people vote 'no' the issue will not be brought onto the market. COPs do not have to be voted on meaning that the issuer can bring out a bond issue, even if it's not in the best financial place to do so. What makes these bonds such poor quality is that instead of being supported by a specific revenue, a committee meets annually to appropriate funds for the payout of these bonds. This committee is also legally able to decide not to appropriate funds should the issuer have financial trouble. In economic hard times like we're in, it's likely many COPs will decide not to pay out and the holders of these bonds will be left out in the cold with nothing to keep them warm except a sweater with holes in it.
Notes of Anticipation : Notes of Anticipation are often passed off as regular bonds when in fact they are far from the quality of true bonds. Notes of Anticipation means that the revenue to pay them is not factored into the issuer's budget, the bonds are payable from anticipated (as in what they hope or plan to get) revenue. Whether we are in a recession or not, I do not think it's wise to buy a bond where you have to hope the issuer makes certain revenues to pay for your bond. You may have heard about Orange County CA defaulting a few years ago. Orange County CA bonds were fine, it was their notes that defaulted. While you may not need a sweater in Orange Co. CA, you get the idea...
Tobacco Bonds : Many states have bonds that are Tobacco Settlement bonds. These bonds are not actual bonds of the town or county or state that these bonds are in, they are backed by the cigarette companies. Basically the cigarette companies lost a bunch of law-suits for selling something that gave a bunch of people cancer, they needed money to pay for these suits, so they issued bonds. The fact of the matter is that with more and more people quitting smoking along with the tobacco companies continuing to lose law-suits, how long will these companies stay in business and have the money to pay off their debt? If you really think that these tobacco companies are worth their salt, er, tobacco, you should buy their coporate bonds. At least that way you'll know exactly what's backing your money.
Natural Gas Bonds : Municipal bonds that are natural gas bonds are not essential service revenue bonds meaning they are not payable from everyone's gas bills. In fact, they're not supported by any gas at all. These bonds are obligations of a financial institution. If you happen to buy a natural gas bond that's backed by Goldman, then you're sitting pretty, for those people who happened to buy natural gas bonds that were backed by Lehman, never mind a sweater with holes, they're pretty much working with a few shreds of yarn. These bonds are now worth about 3 cents on the dollar which really stinks for anyone who bought them around 90. Similar to the tobacco bonds, if you're going to buy a natural gas bond, find out which financial institution actually supports it and buy their corporate bonds. This way you'll be fully aware of how much risk you're taking.
AMT Bonds : The Alternative Minimum Tax was put in place in 1986 as a tax on people with a lot of deductions. Since the rate has stayed the same since 1986, with inflation along with bracket creep, more and more people fall into the AMT every year. If you are in the AMT and buy a bond that is subject to it, your investment will essentially be taxable. Even if you are not in the AMT, I would be careful when buying these bonds because you could fall into it with in the next few years.
While these bonds are always on sale meaning that you can get them for much cheaper than regualr bonds, each of them comes with a price. Usually that price is quality. So if you're looking to buy a municipal bond and the price seems too good to be true, take a second look, your investment probably has a hole in it.
COPs : Certificates of Participation (COPs) are bonds that can be brought into the market without a vote. When you're dealing with a regular municipal bond, for the issuer to bring the bonds onto the market, individuals vote on the issue and if enough people vote 'no' the issue will not be brought onto the market. COPs do not have to be voted on meaning that the issuer can bring out a bond issue, even if it's not in the best financial place to do so. What makes these bonds such poor quality is that instead of being supported by a specific revenue, a committee meets annually to appropriate funds for the payout of these bonds. This committee is also legally able to decide not to appropriate funds should the issuer have financial trouble. In economic hard times like we're in, it's likely many COPs will decide not to pay out and the holders of these bonds will be left out in the cold with nothing to keep them warm except a sweater with holes in it.
Notes of Anticipation : Notes of Anticipation are often passed off as regular bonds when in fact they are far from the quality of true bonds. Notes of Anticipation means that the revenue to pay them is not factored into the issuer's budget, the bonds are payable from anticipated (as in what they hope or plan to get) revenue. Whether we are in a recession or not, I do not think it's wise to buy a bond where you have to hope the issuer makes certain revenues to pay for your bond. You may have heard about Orange County CA defaulting a few years ago. Orange County CA bonds were fine, it was their notes that defaulted. While you may not need a sweater in Orange Co. CA, you get the idea...
Tobacco Bonds : Many states have bonds that are Tobacco Settlement bonds. These bonds are not actual bonds of the town or county or state that these bonds are in, they are backed by the cigarette companies. Basically the cigarette companies lost a bunch of law-suits for selling something that gave a bunch of people cancer, they needed money to pay for these suits, so they issued bonds. The fact of the matter is that with more and more people quitting smoking along with the tobacco companies continuing to lose law-suits, how long will these companies stay in business and have the money to pay off their debt? If you really think that these tobacco companies are worth their salt, er, tobacco, you should buy their coporate bonds. At least that way you'll know exactly what's backing your money.
Natural Gas Bonds : Municipal bonds that are natural gas bonds are not essential service revenue bonds meaning they are not payable from everyone's gas bills. In fact, they're not supported by any gas at all. These bonds are obligations of a financial institution. If you happen to buy a natural gas bond that's backed by Goldman, then you're sitting pretty, for those people who happened to buy natural gas bonds that were backed by Lehman, never mind a sweater with holes, they're pretty much working with a few shreds of yarn. These bonds are now worth about 3 cents on the dollar which really stinks for anyone who bought them around 90. Similar to the tobacco bonds, if you're going to buy a natural gas bond, find out which financial institution actually supports it and buy their corporate bonds. This way you'll be fully aware of how much risk you're taking.
AMT Bonds : The Alternative Minimum Tax was put in place in 1986 as a tax on people with a lot of deductions. Since the rate has stayed the same since 1986, with inflation along with bracket creep, more and more people fall into the AMT every year. If you are in the AMT and buy a bond that is subject to it, your investment will essentially be taxable. Even if you are not in the AMT, I would be careful when buying these bonds because you could fall into it with in the next few years.
While these bonds are always on sale meaning that you can get them for much cheaper than regualr bonds, each of them comes with a price. Usually that price is quality. So if you're looking to buy a municipal bond and the price seems too good to be true, take a second look, your investment probably has a hole in it.
Monday, November 30, 2009
Muni Bond Insurance : About as Useful to your Investment as a Kids Comfort Object
Our society has come to value insurance in the same way little tikes value their baby blankets and teddy bears. As children we loved our teddy bears because they would protect us were anything to happen through out the night that the good 'ol night light couldn't take care of. As adults we pay up for insurance because it's supposed to protect us against any unforeseen financial boogie monsters. The majority of the time insurance serves its purpose when dealing with types of insurance like life insurance and car insurance but a teddy bear (insurance company) can only protect a certain number of people (securities), if it's spread too thin, or protects someone who lives in a ghost and ghoul ridden house (junk), it's protection powers fade to nothing. Basically in the Fall of 2008, nearly every municipal bond insurance company had its ratings lowered from AAA down to at least Aa, in most cases a lot lower than that. The reason for this is that they were insuring other types of securities aside from municipal bonds such as the CDOs that we've all heard about that started our economy to tumble. Once these securities went bad, so did the insurance companies.
The difference is that while the CDOs actually were poor investments, the municipal bonds that the same insurance companies were insuring were fine. Of course the ratings were lowered on these bonds because they could not show the insurance company's AAA which in some cases is now CC but the true quality of the bonds stayed the same insurance or none.
Municipal bonds have been known as one of the safest securities you could buy for over 100 years now, bond insurance came about in the late 1980s and shortly after that nearly 75% of all munis were rated AAA. The underlying quality of munis never changed, municipal insurance companies just came up with an easy way to make a profit. Basically as investors we love to hear that our investment is insured (comes with a teddu bear) so we'll pay more for an insured security than one that doesn't have insurance (EVEN WHEN THE SECURITY IS STRONGER THAN THE INSURANCE COMPANY). Now that the insurance companies are not worthy insurance to pay for, nearly all the municipal bonds that these companies insured are doing fine without the insurance. The moral of the story is, don't pay up for a bond that has insurance.
So how do you tell a municipal bond's true quality if you can't depend on the insurance? First off, look at what is paying the bond (ask your broker) specifically who is holding your principal and how are they going to afford to pay your interest? If it makes sense to you such as, a general obligation bond (payable from property taxes) or a essential service revenue bond (water, sewer, gas, electric) which are payable from everyone's bills, then these are reliable sources of revenue to pay off your bond. You want sources of revenue that people don't have the option to pay such as taxes, bills of an essential service, and tolls. Another factor to look at is the bond's rating without insurance. Usually this will give you a good idea of the security's quality but not something you should always depend on. Most important is what is paying your bond.
While there are some types of insurance in our society that can give great comfort such as car insurance, municipal bond insurance is just not in the security blanket category. Don't fall for it.
The difference is that while the CDOs actually were poor investments, the municipal bonds that the same insurance companies were insuring were fine. Of course the ratings were lowered on these bonds because they could not show the insurance company's AAA which in some cases is now CC but the true quality of the bonds stayed the same insurance or none.
Municipal bonds have been known as one of the safest securities you could buy for over 100 years now, bond insurance came about in the late 1980s and shortly after that nearly 75% of all munis were rated AAA. The underlying quality of munis never changed, municipal insurance companies just came up with an easy way to make a profit. Basically as investors we love to hear that our investment is insured (comes with a teddu bear) so we'll pay more for an insured security than one that doesn't have insurance (EVEN WHEN THE SECURITY IS STRONGER THAN THE INSURANCE COMPANY). Now that the insurance companies are not worthy insurance to pay for, nearly all the municipal bonds that these companies insured are doing fine without the insurance. The moral of the story is, don't pay up for a bond that has insurance.
So how do you tell a municipal bond's true quality if you can't depend on the insurance? First off, look at what is paying the bond (ask your broker) specifically who is holding your principal and how are they going to afford to pay your interest? If it makes sense to you such as, a general obligation bond (payable from property taxes) or a essential service revenue bond (water, sewer, gas, electric) which are payable from everyone's bills, then these are reliable sources of revenue to pay off your bond. You want sources of revenue that people don't have the option to pay such as taxes, bills of an essential service, and tolls. Another factor to look at is the bond's rating without insurance. Usually this will give you a good idea of the security's quality but not something you should always depend on. Most important is what is paying your bond.
While there are some types of insurance in our society that can give great comfort such as car insurance, municipal bond insurance is just not in the security blanket category. Don't fall for it.
Monday, November 16, 2009
Taxes are Going to be Hiked higher than a Pair of Tights One Size too Small
In America everyone likes to consider themselves middle class but the fact of the matter is 2 peoples' incomes can vary in the hundreds of thousands and both will declare themselves in the middle. I'm not concerned with changing peoples ideas of where they fit in our economical scale, but more with informing them what type of bond would be the best investment for their tax bracket. While taxes already eat a big chunk of our paychecks, that meal is about to get supersized. Now that our economy is not spiraling out of control, we are going to have to pay for our nice little bailout package that helped put the breaks on. And the way we're going to pay for it is through our taxes being raised, by a lot. Most people don't even know what tax bracket they're currently in and your tax bracket is probably a lot higher than you think. I wish I had better news, but it's only going up. Just to give you an idea, in 2009 a single person who makes $34,000 a year is already in the 25% federal bracket. That doesn't even take into account people who live in states and cities that have additional taxes (most states do). The higher a person's bracket is, the more sense it makes for him or her to invest in tax free bonds. Once your paycheck is already taxed at that high rate, you don't want your investment income to be taxed there too!
A general rule of thumb to go by is if your bracket is 25% or above, you should be looking for tax free bonds. If you live in a state such as NY, CA, MA, MD or MN that have higher state income taxes, you should really stick to buying tax free bonds within the state you live in to get the added bonus of your investment income not being subject to state tax. Just as an example, if you buy a 5% tax free bond and are a NY resident in the 25% bracket, if you buy a NY bond, that's another 6.85% you avoid having to pay on your interest. To get your taxable equivalent, you add your state and federal bracket, subtract it from 100 and then divide that number into the yield you bought the bond at. (25% + 6.85%= 31.85%, 100-31.85=68.15, and 5/68.15=7.34%) Basically you would have to get a taxable investment yielding a 7.34% to equal your net income on a tax free 5% bond.
If your bracket is below 25% (right now less than 34k a year) you should be buying taxable bonds. While many people buy corporate bonds as taxable investments because we want to support our favorite companies, we've all seen what has happened to a lot of corporations in the past year. Once upon a time bond holders had first claim to the company's assets when it went under, now with all these different type of bankruptcies bond holders end up getting screwed. To be safe, and still get a higher yield you should look for taxable municipal bonds. These bonds have the safety of a municipal bond with the yield of a taxable entity, if you're in a bracket lower than 25%, these bonds are great! To get your post tax yield multiply your bracket by the yield you're getting and then subtract that number from your bond yield. For example if your taxable bond yields 6% and you're in the 15% bracket, to get your true yield you 15%*6%= .9 then 6-.9 = 5.1%
Basically, while we're all in the middle class, we're not all in the same tax bracket so get out there, try on some bonds and see what fits!
A general rule of thumb to go by is if your bracket is 25% or above, you should be looking for tax free bonds. If you live in a state such as NY, CA, MA, MD or MN that have higher state income taxes, you should really stick to buying tax free bonds within the state you live in to get the added bonus of your investment income not being subject to state tax. Just as an example, if you buy a 5% tax free bond and are a NY resident in the 25% bracket, if you buy a NY bond, that's another 6.85% you avoid having to pay on your interest. To get your taxable equivalent, you add your state and federal bracket, subtract it from 100 and then divide that number into the yield you bought the bond at. (25% + 6.85%= 31.85%, 100-31.85=68.15, and 5/68.15=7.34%) Basically you would have to get a taxable investment yielding a 7.34% to equal your net income on a tax free 5% bond.
If your bracket is below 25% (right now less than 34k a year) you should be buying taxable bonds. While many people buy corporate bonds as taxable investments because we want to support our favorite companies, we've all seen what has happened to a lot of corporations in the past year. Once upon a time bond holders had first claim to the company's assets when it went under, now with all these different type of bankruptcies bond holders end up getting screwed. To be safe, and still get a higher yield you should look for taxable municipal bonds. These bonds have the safety of a municipal bond with the yield of a taxable entity, if you're in a bracket lower than 25%, these bonds are great! To get your post tax yield multiply your bracket by the yield you're getting and then subtract that number from your bond yield. For example if your taxable bond yields 6% and you're in the 15% bracket, to get your true yield you 15%*6%= .9 then 6-.9 = 5.1%
Basically, while we're all in the middle class, we're not all in the same tax bracket so get out there, try on some bonds and see what fits!
Monday, November 9, 2009
The Skinny on our Anorexic Interest Rates
I'm sure everyone at some point in the past six months has read an article discussing how interest rates are at record lows. What does this mean? Basically that the Fed is keeping rates low to encourage us to spend more. Think about it if it were a credit card, the lower your rate, the more likely your are to to splurge on those shoes on that card as opposed to another card with a higher rate essentially making your shoes more expensive.
A year ago when this entire economic catastrophe hit, people were scared of everything from the very riskiest of stocks to the very safest of bonds. Now that things have settled down, everyone's new fear is inflation and interest rates sky rocketing. I don't believe that's going to happen and here's why. While our government is printing and spending money like a bunch of drunken sailors, you and I aren't seeing any of it. This money is going to all of the large institutions that put us in this mess to not create any more turmoil than they already have. We're all aware that we're not seeing any extra money and the money that those of us who still have jobs make, we're tucking away to pay off our credit card bills from last year's shoes. Basically, the American consumer is not ready to pull us out of this mess like the Fed is hoping. Since we're not ready to spend our hard earned cash, and it will probably take most people at least 3 more like 5 years to pay off their debt, interest rates will most likely not turn around for at least another 5 years. Also, when they do, our economy will not shoot up in a straight line, it's going to be an uphill climb and not like a steep black diamond, think bunny slope.
So basically if you're going to invest in a bond and you like to look short term, look at least 5 years out because if you buy something just 3 years out, your bond is going to mature, rates will still be low, possibly lower and you will have to reinvest at a low or even lower rate. Moral of the story is lock in a bond yield to weather out this storm because right now interest rates seem to be stuck on a prepetual cleansing diet.
A year ago when this entire economic catastrophe hit, people were scared of everything from the very riskiest of stocks to the very safest of bonds. Now that things have settled down, everyone's new fear is inflation and interest rates sky rocketing. I don't believe that's going to happen and here's why. While our government is printing and spending money like a bunch of drunken sailors, you and I aren't seeing any of it. This money is going to all of the large institutions that put us in this mess to not create any more turmoil than they already have. We're all aware that we're not seeing any extra money and the money that those of us who still have jobs make, we're tucking away to pay off our credit card bills from last year's shoes. Basically, the American consumer is not ready to pull us out of this mess like the Fed is hoping. Since we're not ready to spend our hard earned cash, and it will probably take most people at least 3 more like 5 years to pay off their debt, interest rates will most likely not turn around for at least another 5 years. Also, when they do, our economy will not shoot up in a straight line, it's going to be an uphill climb and not like a steep black diamond, think bunny slope.
So basically if you're going to invest in a bond and you like to look short term, look at least 5 years out because if you buy something just 3 years out, your bond is going to mature, rates will still be low, possibly lower and you will have to reinvest at a low or even lower rate. Moral of the story is lock in a bond yield to weather out this storm because right now interest rates seem to be stuck on a prepetual cleansing diet.
Wednesday, July 23, 2008
The Reason behind Jane Bond
Many of my friends tell me that when I tell them stories about work they just hear noise. I think this is due to 2 reasons (neither of which are that I’m a poor story-teller). The first being that there are so many different facets of the finance world that have their own specific language that people think the concepts are too difficult to understand simply because they don’t speak the language. The second is that finance-talk is all around us everyday, especially with the tumultuous market we’re dealing with, and everyone claims to be an expert. I’m no expert, just a specialist.
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