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The Alchemist (01/16/2008)
By Al Thomas
SELL MUNICIPAL BONDS NOW

I know. I know. They are a "safe" investment and there is no income tax due on them, BUT". Pay attention or you could lose your retirement cash. The broker will not tell you what you will read below.

Let's first check what was paid for the bonds. Ask the broker for a quote on the face amount of your certificate. Most paid par which is the amount listed on the face of the bond, usually $100 or $1,000 denominations. Mr. Investor bought 10 bonds at $1,000 each or a $10,000 bond plus some commission.

That's fine, but what is that bond selling for today? $10,000? More? Less?

They will vary in price from day to day as bonds are traded just like stock, but they don't usually have the wide swings that stocks do. Most people don't worry about these minor variations as all they want is the steady tax-free income.

Depending on where you live that is about to change and it could be in large amounts.

Where does the money come from that is paid to the bondholder? Taxes and fees assessed by the county or state.

About 70% to 80% of the income for counties is from real estate taxes. As property is built that adds more revenue. Here is the kicker.

Each year the County Assessor (or whatever you call him in your neck of the woods) revalues the homes and during recent years the tax bill has increased mightily.

Each year the local politicians have seen the extra money and spent it, but they have also done something really stupid. They have taken on long term projects that have payments due for many years hence because they thought home prices would continue up..

What happens when home prices fall due to a slowing economy and people being laid off who can no longer make their mortgage commitments? What happens when home valuations are lowered instead of raised? What happens when they don't have enough to pay the dividends on the bonds?

Two things: 1. Cut services. 2. Default. Either choice is not pretty, but the second is disastrous for the bondholder.

Before that happens word will be out and many bonds will be sold, but NOT at the face amount of the bond. They will start to decline as folks are willing to take less. $9,000? $8,000? $7,000? Who knows.

The only solution is to be one of the first ones to sell - Like NOW. This may not happen in your community. Has the investor checked to see what his local leader has committed him for?

Bondholders have to start their due diligence to protect their investments.

If bonds are going down then don't wait for them to go lower. Take a small loss now because it will be a big loss by the end of next year.

The only safe place is U.S. Treasury Bills. They don't pay much, but they will pay all at any time you want the cash.

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know.

Copyright 2008 All rights reserved.

 

 

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