Nicholas Nassim Taleb wrote a book some years ago called The Black Swan, in which he spent time dealing with the improbability of a single event affecting an entire system, whether financial or otherwise.
What he did say, however, was that when those single events do occur, look out below.
What we’re experiencing right now in the markets is, in my opinion, a “Black Swan” type of event. A meltdown of global proportions where ALL asset classes are getting wiped out without regard.
For some, this is an opportunity of a lifetime. For others, it means the destruction of a lifetime of wealth.
Seeking Shelter? Head For Municipal Bonds
On Thursday evening, I had dinner with my good friend Alex Green, Investment Director of the Oxford Club. We’ve known each other for a long time and we both agreed on one thing
There are opportunities in the market today that are too good to pass up if you’re both patient and not in dire straits.
Of all the investments available today (and there are many), the one that stands out is Municipal Bonds. Considering that we’re likely to see taxes rise in the future to pay for the debts we’re accumulating rapidly today, “muni” bonds should garner serious attention.
So what are they?
Muni bonds – depending on which ones you choose – are obligations of municipalities that use funds for projects with highly bankable streams of income. This includes toll roads, water, and sewer operations etc.
And the kicker is that they’re all exempt from Federal Income taxes. Certain muni bonds are even exempt from state and local taxes, too.
“Strategic Income” From Muni Bonds
When they sold off with the broader market a couple of weeks ago, I recommended some closed-end muni bond funds to my Strategic Income subscribers.
The funds pay tax-free returns between 7% and 10% – absolutely unheard of from AAA and AA rated bonds. Some of them are even insured, too. That works out to after-tax returns of 9%-plus, depending on your bracket. Some are still trading at levels that will pay you 7%-plus today.
So what’s the risk? The risk is that like municipalities might “default” and not be able to pay their debts. It isn’t a very strong risk – it’s only happened 1% of the time in recent history – but the risk still exists nonetheless.
To put it in perspective, it would equate to a wholesale crash in the financial system – much, much worse than what we’re experiencing today. It would mean the total destruction of capital as we know it.
And since that isn’t very likely, muni bonds are an absolute steal today.
The best way for investors to participate is through closed-end funds that are trading at a discount and offer high yield and capital appreciation potential. Companies like Nuveen and Blackrock offer a slew of these funds, most trading at a discount to the Net Asset Value (NAV).
So while a falling tide is sinking all boats, there are some boats that are better built than others. And if you look in the right place at the right time, they can present superior bargains.
Speaking of opportunities
When The Chips Are Down, It’s Time To Play
Marc Lichtenfeld, our resident biotech and healthcare expert, is confident that the pharmaceutical and biotech sectors both offer some very good opportunities.
Marc says the current situation is full of greed, fear and bluffing – much like a poker tournament. Everybody’s goal is to take home the most possible, but some are having to settle with losing the least possible.
But Marc is a pro. Not only that, he says he’s “staring at a pair of Aces” – and is so confident that he’s “tempted to shove the chips into the pot and go all in.”
He’s got the track record to support it, too.
Just look at his Medivation (Nasdaq: MDVN) pick in the Xcelerated Profits Report. The company announced this week that it has agreed a $725 million deal with Pfizer to partner on Medivation’s Dimebon drug for Alzheimer’s and Huntington’s Diseases.
But even though the firm has greatly reduced its risk, the stock is still trading as if the deal never took place. What gives?
Let’s look at it from another angle. This poker game is filled with novices, who don’t seem to know the difference between a high card and a full house – that is, a profitable stock pick and a loser.
They’re basing their decisions on emotions – and quite frankly, if they’re so willing to hand over shares of top-notch companies, then it’s our job to take advantage. I, for one, plan to be aggressive and recommend more stocks over the coming weeks.
Buying quality healthcare stocks is an excellent way to invest without worrying about the far-reaching tentacles of the mortgage crisis.And to prove it, one of Marc’s other XPR picks, Bristol-Myers Squibb (NYSE: BMY) hit a home run on Thursday morning, reporting better than expected earnings and raising its full-year guidance.
Commodities Still Under The Hammer
Over in the commodities world, our expert Lee Lowell is less sanguine about the markets, where many continue to sell off.
His stance is to stick to the sidelines until the dust settles in both the stock and commodities areas.
The situation this week is very similar to last week. The main exception is that gas continues to drop almost daily, as the price of crude oil falls.
Gold and silver – usually bullish in times of economic turmoil, have seen their prices deteriorate rapidly, as investors pull out of even those markets. We continue to look for good value support levels, as many of these markets continue to head south towards them. Until then, being on the sidelines is the safest place.
Rest assured, though, that the commodity markets can turn on a dime – and you can bet that Lee will be on the hunt for bargains.
And while he does that, he’s keeping busy by working on a new set of recommendations that will enable to you to grab some “Instant Money” from the markets, with relatively low risk. Look for more information in your mailbox soon.
Looking For The Bottom (And Yes, There Is One)
Jim Stanton, our resident technical expert, says the fear in the markets is at a record high and that there’s no place to hide.
Due to fund redemptions, deleveraging, margin calls, and investors who just want to get the heck out of Dodge, both stocks and commodities are selling off indiscriminately. This type of action is generally seen around market bottoms, but since the October 10 lows, the best the markets can do is rally for just one day before the selling resumes.
The lows on October 10 appeared to be the “capitulation bottom” that everyone was looking for. But since the strong rally on the following Monday was mostly news-related (the coordinated effort by the several major central banks to chop interest rates and ease the credit crisis), it appeared that it was more short-covering than new buying. We say this because the indexes tested their lows just two days after reaching their rally highs, which is usually too quick for that to occur.
The S&P 500 is down about 40% from its highs last October, so we could be close to seeing a tradable low sooner rather than later. The indexes have consolidated over the past two weeks – a trend that could continue. Be aware, though one more new low is probably in the cards, so there could be a good buying opportunity soon.
Finally it stinks out there right now! We know that. But that’s usually true of unhappy endings and happy new beginnings. Warren Buffett said last week that even he, the king of value, saw no better opportunities now than in American stocks.
That doesn’t mean the worst is over, but it does mean that some are willing to make bets with more than just their well-built reputations.
Enjoy your weekend.
Karim