The Best Kept Secret off Wall Street. February 2011. I am glad to be back at my
dinner table after finishing the addition/remodel. I am less certain my kids like to ...
The Best Kept Secret off Wall Street February 2011 I am glad to be back at my dinner table after finishing the addition/remodel. I am less certain my kids like to be reminded of a few of the same old table talk topics like our family rule that “We do what we need to do before we do what we want to do.” Yes, Jack, that still means a little broccoli before chocolate cake. The same principle holds true at our offices where occasionally we inspire the same eye-rolling when we surprise most folks that are referred to us by discussing the importance of defense disproportionately to the time we spend outlining our offense. We think now is a particularly good time to review how we like to play defense and answer a few questions raised recently which have created a historic opportunity shown just below. I want my own investment portfolio, no different than my home, to have a secure foundation with insurance to protect it against storms before I worry about any add-ons or growth of any kind. Outside of retirement accounts, each partner of ours who trusts us to do for them what we do in our own personal accounts – a solemn oath we take at our family owned and operated firm - knows that handpicked individual tax-free municipal bonds (Munis) are what provide that peace of mind for all of us. By the time you are done reading why we believe so strongly in one particular type of Muni, you will wonder as we do why it remains the best kept secret off Wall Street. Perhaps it is because Texas, where that secret lives, could not be farther away from Wall Street by proximity or principles. Every investor you know has a greater fear of loss after this past decade. And looking forward, there is not one of them that believe federal income taxes are headed lower. So then why is a secure Muni owned by less than 2% of households in the United States? Never in my career have I found a more astounding contradiction. The answer used to be that Munis just made sense for the “rich.” That is no longer the case. Munis have always traded with a lower yield than comparably safe U.S. Treasury Bonds because taxes are owed on a Treasury’s interest, unlike a Muni. However, as a result of the global credit crisis over the past few years, there has been worldwide demand for Treasury Bonds in a flight to safety pushing those yields down so low that math on this Muni/Treasury ratio has been turned upside down in a historical anomaly.
AAA-Municipal / Treasury Yield Ratio (10yr) 130.0% 120.0% 110.0% 100.0% 90.0% 80.0%
Muni / TSY
Average Since 1987
This chart shows the yield on a Muni as a percentage of a Treasury, both maturing in ten years. Historically, that ratio has been around 83%. In other words if the Muni yielded 3% tax-free, a Treasury would be expected to yield close to 3.7% which was fully taxable. Now, as you can see above, AAA-rated tax-free Muni yields are higher than taxable Treasury yields. Finding secure tax-free yields higher than taxable yields is the silver lining from Wall Street’s storms for an investor in any tax bracket and is hiding in plain sight right now from more than 98% of U.S. households who do not own any. Yet they all agree that their taxes are about to go up without them!
What you have just read is only an excerpt of the K&C letter dated above. If you would like to be added to our private group of partners and friends who will receive future letters please call or e-mail our office.
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