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I Want to Buy Muni-Bonds For A Safe Haven - Are You Sure About That?

July 11, 2012 | Comments: 0 | Views: 433

A few months ago, I was at Starbucks talking to someone about stocks and bonds, he and his wife had worked hard and were worried about the stock market. They wanted something much less risky. He liked the idea of the tax benefits of investing in municipal bonds and stated that he thought he wanted to purchase local muni-bonds for a safe haven. Okay so, let's talk shall we?

Hey before, I go and talk about Birmingham AL, or the capital of Pennsylvania; Harrisburg as some heavy hitters, big city bankruptcies, let's go ahead and look out on the Left Coast in California. We all heard about Stockton CA with a population of 291,000 and deeply in debt, albeit with a Bullet Train terminal soon, then came the cool little resort town of Mammoth Lakes CA, which is not so great but understandable due to seasonality, weather, and economic issues lessening vacation travelers to that altitude - but now another fairly large city 209,000 in population is filing chapter nine - San Bernardino CA - ouch!

The other day, I was speaking with a financial adviser who just had a client sell all their muni-bonds, the financial adviser was happy for the commissions and re-invested the money in more secure top rated corporate bonds. Good timing in hindsight, because this latest San Bernardino CA bankruptcy is liable to be the one which causes a cascading effect, similar to what Meredith Whitman had riled markets about last year. As more cities fail, the cost to borrow goes up, meaning the payback costs are greater, and fewer buyers of the bonds, thus, a migration far away from such financial vehicles.

Okay so, where is a city to go? Good questions, and with real estate still down in many places, there are fewer revenues for property tax, and the economy is still troubled so retail sales are also down, so too then are tax revenues. I've yet to hear of a California city anywhere that didn't have a pension and legacy cost problem. The San Bernardino city council voted for chapter 9, but really they had no choice, the creditors want their money - $43 million of it, and sooner than later. So, 3-months no pay, no pension contributions, and huge cutbacks too, plus, the bankruptcy.

Why now? Well, the city council noted; accounting errors (sure blame it on the accountants), deficit spending (gee, whose fault is that), pensions (city unions again), and debt costs (something that a good number of cities are also dealing with now). So, regarding my title and that person I met at Starbucks a few months ago, well; "I wouldn't if I were you!" Please consider all this and think on it.

Lance Winslow has launched a new provocative eBook on Stocks and Bonds. Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank; http://www.worldthinktank.net

Source: EzineArticles
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