Where Your Money Needs to Be Before the Next Correction Hits
By Graham Summers
March 12, 2007
I've got one word for you and your investments: bonds.
At the end of December, BusinessWeek interviewed 80 analysts for their opinions of the market's future. At that time, 86% were bullish. To be fair, 18% of these bulls thought the market would rise, but post gains lower than T-bills. But the overall outlook was that stocks would rise.
Bearish analysts made up 14% of the survey, but of those, only 1% believed the market would fall more than 10%.
Again, the overall outlook was that stocks would rise.
We emphasize "stocks" since they were and still remain by far the preferred investment of choice. According to a Morgan Stanley investment poll conducted in early January, nearly 80% of clients saw stocks as the investment to own in 2007.
Cash and commodities tied for second, with 10% of those polled favoring either investment. A measly 2%-3% saw government bonds as the place to put their money. And corporate bonds? 0%
Investors, both private and professional, are overwhelmingly bullish on stocks right now. The hiccups of the last couple weeks have been alarming... but the bulls have quickly taken over the reins soon after every drop.
Last Tuesday, after the worst single-day drop since the September 11 attacks in 2001, stocks posted the largest single-day gain since July 2006. My friend and colleague Jeff Clark called this bounce to the day.
However, this move will be short lived. And when it's over and the market begins its full-blown correction ― the correction that insiders have been predicting for the last six months ― investors are going to flock to safer investments (read "bonds") just like they did during the market corrections in May and June of last year.
However, the 10-year bond, yielding 4.5%, doesn't give you much bang for your buck. A far better approach would be putting your money into a municipal bond.
A municipal bond is a bond issued by a U.S. state, city, or local government. They're usually used to fund a public-works project of some kind, such as a toll road or bridge. They're just like normal treasury bonds... you hand over your cash, which will be returned later to you with interest. However, the yield is typically lower than that of T-Bills. So as an incentive, the interest earned on "muni bonds" is tax-free.
Even better than a single muni bond is a closed-end municipal bond fund.
Closed-end funds have a fixed number of shares outstanding. Because of this, their share price is based strictly on investor sentiment. Consequently, shares can trade at a premium or a discount to their intrinsic value.
So by investing in a closed-end muni bond fund, you get the yields of muni bonds, as well as the gains made when shares rise via increased demand.
This is where Bill Gross, the greatest bond investor of the 20th century, has been putting his money. Bill is the founder of Pacific Investment Management Company (Pimco). With more than $600 billion in assets under management, Pimco is the largest bond investment firm in the world.
During the last two years, Gross has put $19 million of his own money into a number of Pimco's funds, most notably, its municipal bond funds. One such bond is the Pimco California Municipal Income Fund (PCQ), which Gross recently put $2.8 million of his own money into.
PCQ currently yields 6.15% and it pays out a monthly dividend... but trades at a premium to its underlying assets. You can find funds at a discount by browsing through www.etfconnect.com. Just click on "fund sorter" at the top to get started.
Good trading,
Graham
