Collapse of the Muni Bond Market Sovereing Society

7/28/2019 Collapse of the Muni Bond Market Sovereing Society

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The Collapseof the

Muni-Bond

Market


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Te Sovereign Society

98 S.E. 6th Avenue, Suite 2Delray Beach, FL 33483 USAUSA oll Free el: (888) 358-8125Email: [email protected]

Website: www.sovereignsociety.com

Copyright 2010 by Te Sovereign Society. All international and domestic rights reserved. No part o this publicationmay be reproduced in any orm, printed or electronic, without prior written permission rom the publisher, Te Sover-eign Society.

Notice: Tis publication is designed to provide accurate and authoritative inormation in regard to the subject mattercovered. It is sold and distributed with the understanding that the authors, publisher and sellers are not engaged in ren-dering legal, accounting or other proessional advice or service. I legal or other expert assistance is required, the services

o a competent proessional advisor should be sought.Te inormation and recommendations contained in this brochure have been compiled rom sources considered reliable.Employees, ocers, and directors o Te Sovereign Society do not receive ees or commissions or any recommendationso services or products in this brochure. Investment and other recommendations carry inherent risks. As no investmentrecommendation can be guaranteed, the Society takes no responsibility or any loss or inconvenience i one chooses toaccept them.

Any inormation or statements contained in this publication are not to be considered by the reader as personalized invest-ment advice. Te authors and any agents o Te Sovereign Society are not licensed under U.S. or other securities laws toaddress particular investment situations and nothing herein should be deemed as personalized investment advice.


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State Governments Dirty Little Secret:A Toxic $2.81 Trillion Pile o Debt

Debt in itsel is not a bad thing.

Trough 15 and 30-year mortgages, it allows most Americans to buy a home.Its the driving orce behind the launch o thousands o small businesses.

And municipal debt allows cities and towns to enjoy rapid growth without raising taxes.

Ultimately, all debts must be repaid I not, the borrower goes bankrupt.

Tats what were seeing today. States have lived high on the hog or years and now theyrestruggling to meet their minimum payments.

Its gotten so bad, the National Governors Association has predicted a lost decade or states.

With each passing week, trouble is bubbling to the surace:

Colorado Springs has let 1/3rd o its streetlights go dark sold police helicopters on eBayand halted all street paving.

Arizona has sold then leased back its State House and Senate buildings a desperateone-time move to raise cash.

Illinois liquid assets have dipped below $1 million as they scramble to limit allout rom agiant $39 BILLION decit.

States rom Kansas to Hawaii have cut the ve-day school week down to our or cancelentire grade-years altogether.

Los Angeles has called or ALL city agencies (save Fire and Police) to cut back to a 3-dayworkweek.

Te capital o Pennsylvania has skipped its 2010 debt payments and has been downgradedto high risk junk by Moodys.

And oledo, Ohio admits it may have to lay o EVERY government employee.

Even worse

Some o Americas Most Heavily Indebted States HaveTeamed Up With Wall Street to Mislead andPotentially Deraud Investors

From New York to Alabama to Caliornia a pattern has emerged and its not pretty.

States have used complex derivatives to patch holes in their balance sheets and shue moneybetween accounts to give the appearance o scal health.


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But nothing could be arther rom the truth!

Case in point

Te SEC has accused Miami o playing 3-card Monte with public unds.

Alabama has used credit deault swaps to hide their massive debt burden in a desperate attempt

to lower monthly interest payments.

New Hampshire tried to swipe $110 million rom a medical malpractice insurance pool tobalance its budget.

Colorado attempted to grab a $500 million surplus rom Pinnacol Assurance, a state workerscompensation insurer

Connecticut has issued its own accounting rules to prop up their budget.

Tis kind o behavior is troubling. It should set o warning bells at the highest levels o

government or prompt angry op-eds in Te Wall Street Journal. Yet ew in power haveacknowledged it.

Why Isnt This Common Knowledge?

Tere are three powerul groups that want to keep this story QUIE:

1.) Powerul nancial companies have everything to lose Some o the largest holders o Muni-bonds like AIG, Bank o America and Citigroup are dumping vast quantities o them. I one otheir high prole analysts came orward with the truth, it could cause a panic.

Tats the lastthing they want. Instead o quietly shedding muni-bonds, they would then be stuckwith potential losses o 40 cents even 60 cents on the dollar!

2.) Insurance companies have a HUGE incentive to look the other way. When an insuredmuni-bond deaults, guess who has to pay? Te insurer, o course. Now youd think with that riskhovering overhead, they would be extremely conservative.

But the opposite is true!

Since these companies get paid on volume, they have an incentive to insure as many bonds as

possible. I they step back some other company will swoop in and take the business.

And heres the strange part Te more risk the bond insurers take the saer the bond marketappears to be. Ater all, its ully insured.

But ew people stop to ask what happens i those bonds deault will the insurer be able to pay?And the easy answer is, no. When the muni-bond market comes tumbling down, these insurancecompanies will deault on HEIR promises.


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So youll rarely (i ever) hear an insurer knock muni-debt.

3.) And lets not orget about the rating agencies. At this point, the jig is up. Tese companiesstamped AAA on some o the most toxic mortgage-backed securities enabling them to be soldo to investors who thought they were playing it sae.

Now theyre doing the same thing with municipal bonds!

Since they get paid by the states they rate they have every incentive to udge the numbers. Tiskind o atta-boy business model misleads the public and makes the entire market appear sae even when its teetering on the clis edge.

Heres How to Protect Yoursel Beore this Bubble Burstsand Everyone Realizes Muni-bonds Arent Worth

the Paper theyre Printed On

History shows that when states, cities or towns deault on their debt conservative investors losetheir shirts.

When these bonds go bad, their value crashes by an average o 40.09%!

So how can we tell which ones to avoid?

By ollowing the numbers.

ake Caliornia, or example. Te Golden State has aprojected $12.3 billion decit Tats HUGE and itsonly going to grow rom here.

But the truth is theres a handul o states in ar worsetrouble.

Check out Nevada Tey are in the hole or $1.8 billion which doesnt sound bad compared toCaliornias $12.3 billion.

But ar more important than dollars and cents is the size o the decit, relative to each states budget.

Caliornias estimated decit is around 12.5% Nevadas is nearly ve times as bad at 59.8%.

Same goes or New Jersey Teyre $10 billion in the hole, with a giant 34% decit on their hands.

And the ugliest state o all is Illinois they have just $1 million dollars cash on hand to battle a$12.8 billion decit!

Once a ew municipalitiesdeault, there is a risk o awidespread cascade in deaultsbecause the [stigma] will belessened, all the more so i thedeaults are spurred along by ataxpayer revolt democracy atwork.

Rick Bookstaber, SEC Ocial


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Tese numbers are horric.

States on the Brink o Fiscal Disaster*

State

In the Hole for This

Much in Fiscal Year2011 (Est)

Spending This MuchMore Than They Earn!

Nevada $1,800,000,000 59.8%

Illinois $12,800,000,000 34.3%

New Jersey $10,000,000,000 34.0%

Maine $940,000,000 31.4%

Vermont $338,000,000 30.2%

Arizona $2,600,000,000 26.7%

Connecticut $4,700,000,000 26.7%

Minnesota $4,000,000,000 26.4%Wisconsin $3,400,000,000 24.6%

Colorado $1,800,000,000 24.1%

Georgia $4,000,000,000 23.2%

South Carolina $1,300,000,000 22.7%

North Carolina $4,400,000,000 21.0%

California $12,300,000,000 12.5%

*Most people think the Feds have a monopoly on decit spending! Not true Unless you live in Montana or North Dakota your state is on this list.

But as ugly as the (above) chart looks, reality is ar worse.

Te majority o states have reused to account or o-balance-sheet obligations

In some cases, pension unds are tens o billions short and Medicare obligations are completelyunder-unded. Accounting or these bonus shortages would put these states even deeperunderwater.

In the case o Illinois, their actual decit is closer to $39 billion three times worse than it appearson paper when you actor in under-unded pensions and entitlement programs.

Bottom Line:

You dont want to buy any und or bond thats tied up in this toxic asset class.

But what i youre already invested?

I you own municipal bonds, please be careul. Consider selling or paring down your position


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i its invested in the most debt-ridden states in the union. I you cant picture lie without this tax-ree source o income take a look at the two states that arent running decits: North Dakota andMontana.

I you own Muni-bond EFs and mutual unds watch out! Tese popular unds spread your risk

across the whole country which is much saer than owning a single states bonds. But when theentire market takes a hit, this so-called diversity will count or nothing.

I you depend on tax-ree income and insist on exposure to muni-bonds, consider buying the debto the two states that are NO running budget decits (see below). But keep in mind, there is armore upside playing against the overall muni-market.

Only Two States are Running Budget Surpluses:Montana and North Dakota

You can invest in these healthier state Muni-bonds through a pair o EFsoered by Integrity Viking Funds:

North Dakota ax-Free Fund (VNDFX) and Montana ax-Free Fund(VMX).

Both states are beneting rom the massive 100-200 billion barrel Bakken oildiscovery thats fooded their economies with jobs and petrodollars. So theyreairly well insulated rom the coming Muni-bond Meltdown.

How to Target the Most Bloated, Corrupt Muni-bonds in the Worldand Saely Pick them O or Profts o 33%... 64% and 91%...

From the Comort o Your Brokerage Account

Because the muni market is considered to be a oolproo source o income, ew investors wish tobet against it.

As a result, there arent many ways to play against this market.

Tere is no bearish EF or mutual und that will allow us to short munis and the Credit DeaultSwap market is o-limits reserved or the high rollers o Wall Street.

But that wont stop us rom capitalizing on this trend.

Here are ve ways to prot and protect your wealth beore the Great State Meltdown plays havocwith the market.

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Play #1: Bet on Rising Interest Rates

Investors have made a killing on U.S. reasuries. As interest rates collapsed rom 15% down to 2.6%,the value o long-term bonds soared.

It was an impressive bull market. One or the ages. But over the next 612 months it is coming to anend.

We believe a major bear market in bonds is just around the corner. As interest rates soar, reasuries,Munis, even corporate bonds will plummet in value.

199519901985 201020052000

4%

2%

6%

8%

10%

12%

14%

16%

Interest Rates on U.S. Treasures Have Collapsed Since the Early 1980s

Why the about-ace? We see three key reasons:Te annual cost o unding our national debt is approaching $4 trillion a year.

Investors will demand higher rates rom the government than quality corporate bonds.

One o our top creditors, China recently sold o $34.2 billion worth o U.S. reasury Bonds aslap in the ace to the spend-a-holics who run our country.

Who in their right mind would want to lend us money at 34% or 30 years?

No one!

And the Great State Meltdown will only accelerate this trend.

Teres no chance that any state will be allowed to go bankrupt. Doing so would bringunprecedented chaos and uncertainty to the stock market and directly threaten the saety oAmerican citizens.

Te Feds will have no choice but to divert billions even trillions o dollars to the most beaten-up


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Stocks mustered a massive rally since March 2009 and the VIX ell back to earth. But it wontstay very low or long. A major shakeup in the muni market will spook investors and send it surgingmuch higher toward its 2008 peak perhaps even higher.

Recommendation: Buy the iPath S&P 500 Short erm Fund (VXX) up to $25 with a 25%

trailing stop.

Play #3: Short the MostToxic Muni-bonds

Once in a while, we spot a target thats too big and too juicy to ignore. Now is one o those times

Teres just one catch: Tis strategy is not or beginners or the aint o heart.

Im talking about short selling.

Keep in mind, when you sell short, the most you can gain is 100% (double your money). But i thestock or und zooms higher, you could potentially lose more than that.

Tats why this play is or experienced investors only.

Weve isolated a popular und thats literally creaking underthe weight o toxic muni debt.

Im talking about the Putnam Managed Municipal Incomerust (PMM).

PMM is one o the top traded Muni unds on the planet.Income investors LOVE it because it pays out a high rate ointerest 6% per year.

Teyve piled into PMM pushing the und up 61% since2008.

But easy come, easy go.

Putnam Managed Municipal Income rust invests 60% o itsresources in municipal junk bonds which will be the rstto implode.

Because this und has been run up so high and it containsso many bonds that are border-line junk, it oers us perectopportunity to go short.

How Does Shorting

Work?

Say, you borrow 100

shares of Stock ABCthats trading for $80. Youthen sell those shares toobtain $8,000 ($80 x 100).That money stays in yourmargin account. Then thestock falls to $60. To closeout the trade, you wouldreturn the borrowed sharesor buy to cover, paying$6,000 ($60 x 100).

Then you keep thedifference in this case$2,000.


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Play #4: Cash in on the Worlds Most Hated Insurance CompanyAs AIG Plummets Back to Earth

AIG should be resh in your memory. Tis company insured tens o billions o dollars-worth o toxicmortgage securities. And when the sub-prime bubble burst, they simply couldnt pay-up.

As a result, their shares plummeted rom $69 to 35.

Short sellers made a quick 99% but those who were wise enough to buy put options could havedone MUCH better with returns as high as 10x their money.

And now its about to happen again

oday, AIG the group thats supposedly too big to ail, although it seems like it will die trying! is holding $54 billion o municipal bonds.

Teyve slowly been selling o this position but its sheer size makes it impossible to unloadquickly.

When the muni bubble pops, AIG will suer dearly.

Te best way to play the second crash o AIG is on the options market. Specically, by purchasing aput option.

You can invest as little as $200-300 and potentially turn every C-note into a cool $500 or more without risking a margin call.

One particular option has caught our eye and you can play it through most standard brokerageaccounts.

Buy AIG January 2012 $40 Puts and pay up to $20.00. (Tat means, were betting on AIG stockto sink below $40 a share by January 2012.)

As soon as this position doubles in value, well sell hal and let the rest ride or a risk-ree trade.

Play #5: Play Against the Worlds Most Aggressive

Municipal Bond Insurer Beore it Goes BUST

Another ill-ated company is on the hook or a massive amount o Muni-bonds. Tey insured $29.2billion-worth in 2009 alone ve times more than their nearest competitor and 46x more thanBerkshire Hathaway Assurance Corp.

Last year, their operating income was $316.7 million.


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I you dont have a broker and would like to work with a ull-service proessional who can ecientlyexecute these trades on your behal, eel ree to contact:

Starr Group at Stiel NicolausWebsite: www.starrgroup.net

Phone: 1 (800) 225 8532Email: [email protected]

Te Starr Group at Stiel Nicolaus & Co. is a amily operated business oering a high standardo customer service. Founded in 1960, the group brings a depth o experience and perspective tooptions, currency and equity trading. Each o their clients receives personal attention rom a membero the Starr Family.

Rutsen Meier Belmont (RMB) Group1-800-831-31141-312-528-3065

[email protected]

RMB has traded Agora publication stock and option recommendations since 1984 and is respectedor the quality o their personal service.

Please note we never receive any compensation, directly or indirectly, or any brokerage reerral.

The Most Important Investment YOU Can Make This Year

Betting on higher interest rates hitching a ride on market volatility (ear) and playing againstthe worlds most top-heavy insurance companies and muni-bonds.

With these strategies in place, you can protect your wealth rom the Great State Meltdown and makea killing when the muni market collapses.

But the most important investment you can make is your own sovereignty your independencerom Washington and Wall Street.

We might not be as cash-fush as they are but we do have strength in numbers to help level the

playing eld.

One o our primary goals here at Te Sovereign Society is just that to equip you with the tools youneed to prot like a pro without making the same cumbersome capital investment.

Keep your eyes peeled as we ollow the Great State Meltdown among other opportunities inour monthly newsletter, Te Sovereign Individual.

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Collapse of the Muni Bond Market Sovereing Society