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The Alchemist (03/05/2008)
By Al Thomas

MUNICIPAL BONDS EXPLAINED

Several weeks ago I wrote a column stating to sell municipal

bonds. Several readers wrote asking which kind of bonds as there are several basic types of munis.

Some should be kept and others sold. It can also be used as a guide as to which type to buy now that the stock market has issued a sell signal.

Do not rely on your broker for advice, but have him do research for you. That is why he is there. Have him prepare a written report for anything you sell or buy. You might need it later should his report prove inaccurate. Municipal bonds are tax free which makes them very desirable.

Over the years almost all munis have been paid, but there are times when it has not occurred. This could be one of those times. States and counties issue both general obligation bonds and revenue bonds.

The general obligation bond is usually supported by the issuers taxing power. Almost all are rated AAA, but the wary buyer will look behind the rating to determine the rating of the issuing body. This is critical. Most bond buyers look no further than the rating. Each community has a rating separate from the bond and that is the one you must determine. Anything rated below A is not acceptable.

Insurance against default maybe purchased. Here again the buyer must look to see the quality of the insuring company. Today the market place has found insurance companies with insufficient capital to pay claims if a mass calamity occurs.

The revenue bonds are more subject to default. It depends upon the quality of the bond's income. If a slowdown in the economy should occur (like now) bonds with incomes dependent on consumer spending might default. Golf courses, stadiums, toll roads, even hospitals could see a lessening of income to pay bondholder interest.

A dangerous bond is the MUD bond - Municipal Utility District.

Bonds have been sold to create a new district to put in roads, sewers. and electricity. No homes or businesses have yet been built from which to create income. In a slowing economy these may default.

All signs today point to a slowing world economy. As the U.S. consumer buys less this affects the manufacturing base of China, India, Australia, Germany, Mexico, Russia, you name it. We consume 25% of world production. A 5% decrease in purchasing will mean a reduction in production of more than 1/2 Trillion dollars. This will increase not only our unemployment but that of countries that sell to us.

This is ultimately affected in our real estate market which in turn decreases the income for municipalities that issue the bonds investors buy. Without due diligence everything can be lost. Be careful.

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 no charge on 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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