Tison's Fiasco: Your Money's at Risk and You Don't Know It.
Interest-Rates / US Bonds Mar 14, 2010 - 07:11 AM GMTBy: DailyWealth
I walked the streets of Tison's Landing yesterday...
I admired the incredible neighborhood center for the use of residents, complete with soccer fields and the largest, most fully stocked playgrounds for kids I've ever seen.
From the gaslamp-style streetlights to the manicured public gazebos, no expense was spared. The residents of the 680 homesites across 200-plus acres would no-doubt love it...
The thing is, there are no residents.
Tison's Landing, as I'll explain, highlights the hidden danger of investing in municipal bonds...
Municipal bonds are typically pitched to investors as "safe as money under your mattress." But as the Tison's Landing story will show... they're not safe right now.
Local governments ("municipalities") issue municipal bonds. The big attraction municipal bonds offer is tax-free interest. And they often serve a useful purpose. For example, your county can borrow money to build a toll road (through a municipal bond offering). When it does, it promises to pay back the lenders out of the road's tolls over the next decade or two. Simple.
A toll road makes sense... But does it make sense for a municipality to back a property developer? That's what's going on at Tison's Landing, and hundreds of other property developments like it in Florida.
The basic idea was, the property developer would raise money to put in all the infrastructure (utilities, roads, and so on) through a municipal bond. The investors in the municipal bond would first collect interest from the developer, and then the residents once houses were sold.
The problem in Tison's Landing is, the developer stopped paying interest. And there are no residents. So there's nobody to pay the interest on the municipal bonds...
The Lights Are On (Thanks to Municipal Bonds)
But Nobody's Home
The photo above tells the story. All the infrastructure is in at Tison's Landing... electricity, water, streetlights. You can even see one of those community "gazebos" in the background. The empty lots literally go back as far as the eye can see. If I turned around and took another picture, it would look the same. There are 680 lots in all.
Municipal bonds paid for all of this. But municipal bondholders are not collecting interest anymore.
Who holds these bonds? YOU DO.
Mutual funds and pension funds are the usual holders. So in your retirement account, you probably own a stake in Florida "dirt bonds" like those of Tison's Landing.
Fund managers are selling these bonds at a 70%-plus loss in principal value now. They'd rather take the loss than take over the property and wait for a rebound. But it's not the fund managers taking the loss... it is YOU... the investor.
"We're managers of municipal bonds, not real estate people," one fund manager told Bloomberg news earlier this week about his Tison's Landing bonds. "We thought about foreclosing but decided the risks were too great."
Explaining why he sold at a big loss, he said: "We can't just write checks for development costs... If you have a $10 million bond that someone offers $5 million for, there's value in cutting and running and re-investing that cash in a solid project."
In the latest issue of my True Wealth newsletter, I recommended selling our position in municipal bonds. Readers pocketed a 13% profit in 13 months. About half of that profit was in tax-free dividends.
Specifically, I told my readers: "Municipal bonds are no longer smart to hold. We don't know which town will explode next. And we don't want to be holding that town's bonds... especially to earn tiny rates of interest."
I recommend the same for you now... Many more municipalities will go bust. The tiny rate of tax-free interest you earn on municipal bonds today is not worth the hidden risks. You could have a portfolio full of Tison's Landings, and not even know it.
Don't be lured in by the tax-free interest rate. Stay away from municipal bonds.
Good investing,
Steve
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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