Monday, November 29, 2010

Build America Bonds: A New Kind Of Municipal Bond To Avoid .

Build America Bonds are an emblematic part of the much maligned 2009 $787 Billion stimulus bill, and not without reason. Like most of the stimulus bill, it's a thinly disguised bailout for special interests. Build America Bonds are targeted toward bailing out irresponsible municipalities and states, allowing them to rack up $160 Billion in new debt since they were created in 2009.

Like so many things, Build America Bonds started out as a noble solution to the financial crisis, specifically the municipal bond market. In 2008, investors became wary of the swelling state and local deficits and for good reason. In 2009, 48 states had sizable deficits. In my own home state of New York, the Government has stated recently that they are facing a nearly $9 billion deficit. Unfortunately, the governor still doesn't understand the problem and continues to mis-characterize it as a revenue problem when it is clearly a spending problem, but that's beside the point. It's easy to see why investors started shunning municipal debt.

As a response, congress created Build America Bonds in which the Federal government provides 35% of the total interest paid by the bond. One has to wonder if that really means much in light of what happened to GM bond holders when the Obama administration bailed that company out. But beside that uncertainty, Build America Bonds have now created the potential for a whole new kind of debt-bomb.

Build America Bonds are slated to expire at the end of 2010, so what will happen to states who have borrowed too much already and investors want little to do with their non-Build America Bonds?

California, essentially bankrupt, has issued $21 Billion in Build America Bonds as a substitute to it's own bonds.

This Federally subsidized, cheap debt has only offered fiscally irresponsible state and local governments to continue their spending binge, and run up an even higher debt tally.

Factor in the unfunded pension liabilities most of these municipalities are carrying and you may start wondering if even the Federal government and helicopter Bernenke have the resources to cleanup the mess when these states start actually going bankrupt.


Sunday, November 21, 2010

How to Double Your 401k (in a decade).

Here's an interesting post on a recent Fidelity announcement that stated that many of their pre-retirement customers doubled their 401k balance during the "lost decade."

By itself that's not saying much since your money should double about every 7 years with a 10% return, which is often cited as what the U.S. stock market has returned historically. But when you consider that the supposed lost decade is one where the S&P 500 had a -4.2% return, doubling your 401k during that time is significant.

So, how did Fidleity participants double their 401k balances?

The same way I did.

When the market tanked in both 2000 and 2008, the Fidelity participants who doubled their balance increased or maintained their 401k contributions. In other words, they bought more shares on the way down - buying low(er). Once the market bottomed and rebounded, they had more shares to magnify their eventual returns.

Of course, this works best in a diversified account of mutual funds, since buying more shares of an individual stock can be more risky if that stock happens to go belly-up before the market turns around.

It's also a bit ironic that just when investors should be doubling down on their investments (provided they are indeed sound investments, and that the investor has done his homework) is when most of them panic and sell, only to magnify their losses instead of their returns.

Saturday, November 20, 2010

Would You Buy Shares in GM?

General Motors (or is that  Government Motors?) released it's shiny new IPO this week, and although it generated a it of buzz from talking heads, the reception from investors seems to be tepid at best:

Besides the performance of the stock offering, there are some serious long term questions about the company itself. For example, consider this article from the WSJ:

The U.S. poured a total of $49.5 billion into GM last year to usher the Detroit auto maker through bankruptcy reorganization. The government has since recouped about $9.5 billion of that money as GM repaid loans, made interest payments and repurchased preferred stock from Treasury.
The article also states that the government would need to sell it's remaining stake in GM at a price of $51 per share just to break even. That's not a ringing endorsement of the supposed turnaround that GM has undergone. Speaking of which, what exactly has GM done to have turned the corner and become profitable?

So, would you invest in GM or are you waiting to see some substantial change in the company before you'd put your money at risk?

Personally, I think the only thing GM has done is play the bailout game exceptionally well, and is now trying to parlay that into a comeback. But it is largely a comeback made of smoke and mirrors.

What say you?