The markets are buzzing about how Detroit's bankruptcy will affect the municipal bond market. However, I (Porter) don't think you can make any blanket statements about the muni market. And I think most folks are missing the most important part of Detroit's bankruptcy...
Buying muni bonds used to be a completely safe bet. Investment-grade municipal bonds (those ranging in grade from A to triple-A) have defaulted only 0.017% of the time over the past 40 years, according to Forbes magazine. That compares with investment-grade corporate bonds, which default 1.187% of the time.
Lots of communities in the United States are fairly well-run and are wealthy enough to sustain the debts they have incurred. But perhaps more important… investors always felt assured that the state would bail out any municipality that got in trouble. An individual city's creditworthiness was beside the point since it had the state's coffers implicitly backing it.
So the important thing to watch as the bankruptcy plays out is whether the state of Michigan bails out the bondholders of Detroit. If it doesn't, I believe we'll see a vast re-rating of the entire municipal-bond complex. And investors and rating agencies will pay much more attention to creditworthiness...
The Detroit bankruptcy has a lot of wrinkles... For example, the city is considering treating its general obligation bondholders as unsecured lenders. General obligation bonds are backed by a municipality's ability to tax... Investors assumed governments would simply raise taxes to pay these bonds rather than default. But in Detroit's case, higher taxes would mean scaring even more citizens away from the city. So the local officials want to move general obligation bondholders down the line in terms of when and how much they'll be repaid.
And the extent to which certain creditors are favored over others will be very important in figuring out what the costs of municipal debt will be going forward. If Detroit robs the bondholders to pay its underfunded pensions or robs the bondholders in order to free up its general obligation tax revenues, you'll see more expensive prices for municipal debt... And that would be very bad for the existing bonds.
– Porter Stansberry with Sean Goldsmith
Last Wednesday, we told you about financial analyst Meredith Whitney's call that Detroit's bankruptcy would result in chaos in the municipal-bond markets.
For two years, Whitney has been calling for "hundreds of billions of dollars' worth of defaults" in muni bonds. But it hasn't happened yet... and as we pointed out last Wednesday, Dr. David Eifrig's Retirement Millionaire subscribers have made a solid profit in munis while Whitney has been calling for a crash. His readers are up nearly 70% on one muni position.
Today, another Wall Street heavyweight is weighing in on municipal bonds... and he's going long.
Jim Tisch has an eye for value... and he comes from investment royalty... His late father, Larry, grew his business from one hotel to the $18 billion conglomerate known as Loews Corp. Loews owns businesses in insurance and oil and gas pipelines. It also owns hotels under the Loews namesake.
The Tisch family grew Loews by buying valuable assets when they could get them at cheap prices. For the most famous Tisch investment story, about Jim buying supertankers in the 1980s, you can read this 2012 DailyWealth.
Today, Tisch sees value in muni bonds...
Earlier this year, he said bond yields were so low, they were competing in an "ugly contest." Since then, the Federal Reserve announced it would taper bond purchases this year. As a result, interest rates have spiked... Yields on the 10-year Treasury have recently jumped from 1.6% to 2.6%, a huge move in a short time.
The higher yields, coupled with the Detroit scare, have pushed prices for muni bonds down... And CNA Financial Corp., Loews' insurance business, increased its muni holdings from $9.6 billion in the first quarter to $10.1 billion by the end of the second quarter. On the company's quarterly call yesterday, CNA said it bought more munis this month.
Tonight, our colleagues at The Palm Beach Letter are putting together a one-time live event featuring investment guru Tom Dyson as well as New York Times best-selling author and multimillionaire Mark Ford.
Mark is one of Porter's personal mentors... and Porter even recorded a message to encourage you to listen in. The event starts at 7:30 p.m. Eastern time tonight. You can register for it by clicking here.
Video-game company Activision Blizzard, which Porter recommended to Stansberry's Investment Advisory subscribers in October 2011, soared last week on news the company would buy back most of European media giant Vivendi's stake in the firm.
Activision Blizzard and a group of investors led by CEO Bob Kotick paid $8.2 billion for Vivendi's stake... a 10% discount to where shares traded on July 25, the day before the deal was announced. The stock surged 15% on the news.
When Porter recommended the stock in 2011, he said Vivendi's involvement in the company scared some investors. But Porter welcomed it...
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Porter's readers are up 44% on the position.
The volume of currency trading hit a record-high daily average of $5.7 trillion in June, according to Bloomberg. And the biggest banks around the globe are cashing in...
These banks trade on commission. So the higher amount of trading means more money in these banks' pockets... Deutsche Bank, the biggest currency trader in 2012, reported higher foreign-exchange revenues for the second quarter. Another banking giant, HSBC, said its foreign-exchange business grew from $746 million in the fourth quarter of 2012 to $871 million for the second quarter of 2013. And Goldman Sachs said its currency trading revenue was "significantly higher" in the second quarter compared with the same period last year.
The experts Bloomberg cited said that the massive amount of government currency manipulation – paired with the potential for major price swings, which we've already started to see – is making traders eager to jump in and make some money.
As you're aware, Federal Reserve Chairman Ben Bernanke said it could start tapering bond purchases later this year. But his European counterpart, European Central Bank chief Mario Draghi, said he'll continue to hold rates at record lows, and was considering additional stimulus to inject some life into the economies of the European Union members. And Japan's Prime Minister, Shinzo Abe, said he'll print as much money as it takes to inflate Japan's economy.
Most folks completely ignore the currency markets... They don't think directional moves in the yen or the euro affect them... But they're wrong. As Porter explained in the July 25 Digest, currency movements can destroy your savings...
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In fact, we think the currency markets are so important, we asked Dr. Steve Sjuggerud, whose PhD dissertation was about currency movements, to write an entire report on the subject... in language everyone can understand.
Steve's presentation explains in detail how these forces work... and how they affect you and me. In this report, titled "The Greatest Currency Trade of the Next 10 Years," he recommends several unusual trades that can help you profit immensely during all these currency fluctuations.
While Steve's trading ideas are related to currency movements, they don't actually involve traditional currency trades. And you can easily execute most of them in a conventional brokerage account with the click of a mouse.
We're at one of the most important points in history in regards to global currencies... Central banks around the world have printed trillions of dollars they can't afford to pay back. And it will result in weakening currencies and inflation. It's imperative you have a good understanding of how these markets work to protect yourself and your family.
But Steve's new report will provide you with all the education you need to navigate this market. By the end, you'll know more than most bankers and MBAs.
Since we made Steve's report available last week, it's already become incredibly popular with our subscribers...
Subscriber Mark. M. writes...
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Subscriber Craig N. says...
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And subscriber Don P. writes...
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To gain access to Steve's currency report, click here to learn more about a subscription to True Wealth.
New 52-week highs (as of 7/29/13): Activision Blizzard (ATVI), Hershey (HSY), Integrated Device Technologies (IDTI), and Johnson & Johnson (JNJ).
More positive feedback about Detroit... Where's the outrage this time? Send your feedback to feedback@stansberryresearch.com.
"Thank you for your follow up article explaining the Detroit debacle. Deliberating on the predicament of Detroit and our society I came to the conclusion that most people think we live in a free society. We were taught this in school. I think however that there is a big difference between Freedom and Liberty.
"Liberty is right you are given by your creator from the time you take your first breath. President Thomas Jefferson and all agreed that we are endowed by our creator with certain rights among them life, liberty. Freedom is horse of a different color. Freedom or lack thereof is what the Government allows you to have. Persistent, pervasive and accumulated laws, rules and regulations restrict your freedom to pursue your happiness. As we continue on this path our very liberty and thus our rights have been taken from us and this trend indicates that in time we shall lose all connection to our right to liberty.
"The younger generations have grown up with restrictions on their freedom and think that this is what freedom really must be because they have been told, and they believe, that we live in a free country. Maybe so, but do we have the liberty given to us by our creator, or has it been restricted by the laws of Government politicians (people like you and me). Laws, some of which, I'm sure you think are a ridiculous restriction of your liberty. Political power, the power to tax and regulate stifles ALL who are the brunt of taxing and regulating, which brings me to the predicament of our society.
"A hundred years ago our society was unencumbered from the enslavement of high Government taxes and onerous regulations and because of the laissez faire capitalist system our country grew and the poor became the middle class and lived well. Yes the wealthy prospered, too.
"Today we have a socialist system, restricting our freedom with high taxes and regulations which must be obeyed or go to jail. The socialist philosophy sounds so sweet, because everything is free. But there is no free lunch and people are beginning to feel the results. Hello Detroit. Because of socialism creeping into and now running our society, the middle class is losing its wealth and becoming part of an ever growing poor class.
"It is not about the fight between the republicans and democrats to see who gets the political power to see which group is taxed or regulated more. It's all about liberty.
"Regarding my Liberty. It occurred to me that perhaps the NSA (National Security Agency) may have monitored my email to you. I wonder what they must think of my remarks. Hmmn. I never ever thought to be concerned of expressing my views in earlier times. Oh well, if a man in a trench coat knocks on my door and asks to see my residency papers, I'll know that I'm in trouble. I guess maybe I should keep my thoughts to myself. As I said before, it's all about Liberty!" – Paid-up subscriber Joe Volpicelli
Regards,
What everyone is missing about the Detroit bankruptcy...
Following Detroit's bankruptcy, some financial experts said to avoid municipal bonds... Others took advantage of the selloff to buy more.
But Porter thinks these folks are missing the most important question surrounding the bankruptcy...
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What everyone is missing about the Detroit bankruptcy...
Following Detroit's bankruptcy, some financial experts said to avoid municipal bonds... Others took advantage of the selloff to buy more.
But Porter thinks these folks are missing the most important question surrounding the bankruptcy...
To continue reading, scroll down or click here.
What everyone is missing about the Detroit bankruptcy...