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Saturday, December 15, 2012

Popular Investor Dropped Out Of Municipal Bond Environment 

News Flash: legendary investor Warren Buffett has closed out his $8 Billion+ muni-bond wager, ending his bullish position.

Why Would Mr. Buffet Drop Bonds?

Clearly, Mr. Buffett believes the municipal bond environment is getting too dicey, and he wanted out. The question you'll want to be asking yourself is whether or not you should do the same.

Currently, investors are pouring money into muni-bonds. The Yahoo!Finance article states, ”Investors have generally remained positive on the $3.7 trillion municipal market, pouring $964 million into municipal-bond mutual funds last week - 18 straight weeks of inflows.” These inflows have continued even as we see a number of issues in California defaulting and with news of Scranton, PA about to follow. Muni-bonds are paying decent interest rates, and individual investors are chasing those rates while ignoring any potential risk of default.

What About The Average Investor?

But individual investors should beware; as early as December 2010, we’ve had warnings about muni-bonds. Meredith Whitney came out on “60 Minutes” to warn of rough seas ahead for muni-bond holders. Further, Mr. Buffett himself has shared his misgivings on the road ahead for muni-bonds predicting that there will be a “terrible problem.”

So the “experts” are getting out while the “amateurs” (individuals) are getting in. If you study market history, this is about the clearest signal you can ask for to gain a good understanding for what will soon occur. Whenever the “experts” are moving in one direction as the “amateurs” are doing the opposite, you can just about count on the “amateurs” getting slammed as the “experts” make a bundle.

In Conclusion

If you own muni-bonds (with the exception of those maturing in the next few years), now you may consider yourself officially warned.

Matt Golab

Matt is an Investment Advisor Representative and the Chief Advisor of Aaron Matthews Financial Resources located in Elk Grove, CA. Click on here to learn more about Matt Golab.

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