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Thread: weekend commentary - 'rich' investors now moving to Muni Bonds

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    Default weekend commentary - 'rich' investors now moving to Muni Bonds

    As always, politicians can announce / publicize their intention to increase income taxes on the 'rich'. However, in reality, the 'rich' can take pre-emptive action to minimize / eliminate the impact of those announced income tax increases. In this case, money is already starting to shift out of commodities / securities and into federal and state income tax free Municipal Bonds.



    (snip)"Munis Gain as Tax Cuts Expire in Shift to 40% Bracket (Update1)

    By William Selway

    Aug. 28 (Bloomberg) -- Wall Street has some election-year advice for its customers: load up on municipal bonds because income taxes for the wealthy are bound to rise.

    With a record budget deficit of $482 billion awaiting the next president, strategists are betting Democrat Barack Obama and John McCain, the presumptive Republican nominee, will be forced to increase charges for top earners. That would boost the value of the tax exemption on income from state and local government debt, which has eroded since Ronald Reagan made cuts a pillar of his administration when he took office in 1981.

    ``Tax rates are going to be higher no matter who's elected,'' said Craig Elder, the fixed-income analyst in the private wealth division at Milwaukee-based Robert W. Baird & Co., which oversees $60 billion for individuals. ``If you're in the top tax bracket, munis are your strong buy right now.''

    Obama, who was formally nominated at the Democratic National Convention in Denver yesterday, plans to boost costs for couples earning more than $250,000 a year by rolling back the highest two brackets to where they were before President George W. Bush's tax cuts were passed in 2001 and 2003. The top rate will return to 39.6 percent, according to Obama's campaign Web site.

    McCain says he would leave the top bracket at 35 percent when Bush's measure expires in 2010, and push through more reductions, including a lower rate for corporations. Investors say Congressional opposition and a national debt of $9.62 trillion, an amount equal to 67 percent of the nation's gross domestic product, will derail McCain's plan.

    `Money to be Made'

    States including California and New York, wrestling with deficits caused by the slumping economy, have also proposed raising taxes to pay for government services.

    ``If you've got a two- or three-year, or preferably a longer time horizon, I think there's money to be made in the muni market,'' said George Strickland, who invests $3 billion in municipal bonds for Thornburg Investment Management in Santa Fe, New Mexico.

    Any source of demand would provide a respite for the $2.66 trillion of municipal bonds outstanding. The securities are headed for their worst performance since 1999, returning 1.26 percent, after losses on debt linked to subprime U.S. home loans cost the biggest bond insurance companies their AAA credit ratings. That led some investors to sell the tax-exempt bonds those companies backed.

    The return on muni bonds this year compares with a 4.13 percent gain for Treasuries, according to Merrill Lynch & Co. index data. "(snip)


    the kicker for 'small time' investors, though, is that the purchase of a single high yield high quality muni bond typically involves a $50,000-$100,000 outlay. Those of us who don't have this kind of cash do have the option of 'subdivided' bonds involving a $5,000 outlay, or ETF and mutual funds with no minimum outlay. But as always, the net returns from 'subdivided' bonds or ETF's or mutual funds carry a lower interest rate than the 'real thing'.

    Even so, if you live in a high income tax state like New York or California, and if you earn $75k+ per year, even the 3-4-5% rates of return available from the low outlay Muni Bond options start to look very attractive versus 5-6-7% fully taxable earnings which are about to be hit at a combined federal and state tax rate of 40%+ !!!

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    Ya'd think they would cut spending.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    ^^^ not wanting to delve too deeply toward the political side of taxes, but no self-serving politician who values his future 'career' can afford to cut spending in any meaningful way. The reasons of course are that two large swaths of the politicians' voter support would be directly and personally impacted by such gov't spending cuts ... those who receive social welfare benefits, and those who depend on gov't spending for their weekly paychecks.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    interesting.. i thought the AMT pretty much killed the muni market....

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    ^^^ the 'rich' have calculated that the proposed Obama tax increases will push regular tax rates on their income and dividends above the AMT rate !

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    yikes.... scarey all by itself... but may not be far from truth.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    yes, the truth is not too far from the truth.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    Wouldn't they be earning interest below the rate of inflation? Or is there an expectation that the slowdown of the global economy would lower inflation?

    And, BTW what's up with the recent strength of the dollar? Why are foreigners selling off their currencies in order to buy the US dollar? Isn't the dollar supposed to collapse at some point soon? Peter Shieff is still very bearish on the dollar.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    ah yes the dollar strength. I chalk it up as the 'new home' of offshore hot money that is moving out of commodities futures and moving into US dollar futures. Arguably the bank of Japan is a big player, since their 'carry trade' is threatened if the dollar weakens against the Yen. I happen to agree with Peter that the fundamentals on the US dollar suck. However, like every other world market item, fundamentals seem to lose out to speculators in the short term at least.

    As to available interest rates on muni bonds versus the rate of inflation, that judgement call is dependent on what measure of inflation you actually choose to use. More relevant is probably the after-tax rate of return on a muni bond ( which is the 'face value' interest rate) versus the after-tax rate of return on other investments involving similar risk (which may soon take a 36%+ tax bite).

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    Could THIS be behind the recent rise of the dollar?

    from http://www.gold-eagle.com/editorials...ie091108.html:

    " In the past two months, a remarkable sequence of events has taken place regarding US$-based bonds. They have been called home, a demand to be brought back to US shores. While Wall Street and the key financial USGovt ministries celebrate the rise in the USDollar that results immediately, few seem to realize that something much more important is happening. Imagine a company calling to the corporate laboratory all defective devices, in order to prevent them from exploding in customer faces. The lab sends the collection of destructive items into a remote abandoned field so they can explode safely. That is the analogy, except that the US financial arena cannot explode the USTreasury Bonds and USAgency mortgage bonds safely. As they crater, implode, or default, the system is killed.

    In all likelihood the Bank For International Settlements in Basel Switzerland ordered the United States to call in USTreasurys and USAgencys, the bond instruments, the financial weapons of mass destruction. The BIS ordered the financial leadership to call their damaged risky debt securities home, so that they can explode on US soil, so that their greatest concentration rests on US soil, so that the maximum loss occurs to US institutions, so that the risk can be kept to a practical minimum for foreign nations. "

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    the 'tin foil hat' crowd would certainly acknowledge that explanation as a possibility. It is an absolute fact that - for essentially the first time in history - international monetary authorities are now investigating America's 'balance sheet'. An equally disturbing possibility is that America has somehow cut a backroom deal with the Saudis to shift their (sovereign wealth fund) assets out of europe and into the USA - which would explain why the euro vs USD exchange rate has moved much farther than the USD exchange rate against the Yen / Yuan etc.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    If it's true, why would Saudis want to move their SWF into a "dying" dollar? It's a mistery to me.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    ^^^ because if the dollar does die then Americans won't be able to afford to keep buying as much Saudi oil ... plus the entire world's economy is likely to go in the dumper meaning that the europeans, Japanese and Chinese won't be buying as much Saudi oil either ! Keep in mind that the Saudis have to worry about staying in power first, and worry about profits second. Ultimately, the US military is covering the asses of Saudi princes who could very well be overthrown by more radical Muslim elements were such not the case.

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    Could this have something to do with Iran? Maybe Pakistan?

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    ^^^ I'd be very surprised. I think that Melonie is probably closer to it. The Saudi's have enough that they can spend to stay in power. It sounds stupid, but politicians the world over do it. They just usually use other people's money!!

    The thing about currency rates is to watch the VERY long term trends. Currencies move in one general direction for a very long time. A very long time. But in amongst that, there will be unusual movements that buck the trend.

    However, you view the current US$ strength, the general trend is very much down. I'm sorry to say, for the American readers, but I fear that much further down is the general direction. And after the election happens, the pressure is off again...

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    Default Re: weekend commentary - 'rich' investors now moving to Muni Bonds

    Quote Originally Posted by Melonie View Post
    ^^^ because if the dollar does die then Americans won't be able to afford to keep buying as much Saudi oil ... plus the entire world's economy is likely to go in the dumper meaning that the europeans, Japanese and Chinese won't be buying as much Saudi oil either ! Keep in mind that the Saudis have to worry about staying in power first, and worry about profits second. Ultimately, the US military is covering the asses of Saudi princes who could very well be overthrown by more radical Muslim elements were such not the case.
    If the dollar falls in the crapper, the Saudi's can sell their oil in whatever other currency seems to be likely to take it's place.

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