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Editor's Note

by Charles Rotblut, CFA

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I realize that some of you may view municipal (“muni”) bonds as dicey. Headlines about Harrisburg, Pennsylvania, Stockton, California, and other towns in financial trouble have cast a negative light on these securities. Add to that the European sovereign debt problems, news articles about wasteful state and local spending, and the dire prediction of widespread defaults by banking analyst Meredith Whitney on “60 Minutes” in December 2010.

Yet the negative perception remains disconnected from reality. More than 16 months after Whitney predicted 50 to 100 sizeable defaults in municipal bonds, the number of actual defaults remains very low. Rather, municipal bonds continue to be comparatively safer than their corporate siblings.

Plus, municipal bonds are highly tax-efficient. Municipal bond interest is exempt from federal taxes and many state taxes. (Exceptions involving the dreaded alternative minimum tax do exist.)

There are risks, however. Municipal bonds, like any bond, are sensitive to changes in interest rates. When interest rates rise, bond prices fall. Some municipal bonds have higher default rates than others, even though overall default rates are low. And any security can trade at a premium valuation.

To give you more insight into muni bonds, I’m including articles from two fixed-income experts: Annette Thau and Robert Doty. Annette discusses the current state of the municipal bond market and explains why she thinks muni bonds are still attractive investments here. Robert breaks down the different types of municipal bonds and explains why some types are more risky than others here.

The balance sheet is the subject of the third article in Joe Lan’s series on financial statement analysis. As he points out, the balance sheet is unique in that it shows a company’s financial status at a single point in time. Joe breaks down the various components and tells you what to look for starting here.

I realize many members prefer to look at the income statement first, casting an eye toward signs of sales and earnings growth. If this describes you, be sure to read about John Bajkowski’s new stock screen. John sought out companies that have increased profits during each of the past five years. You can learn more about the strategy and see a list of the passing companies here.

In addition to the challenges of finding good stocks, investors are also coping with an increasing number of complex financial products. Compounding matters, Americans are increasingly finding themselves responsible for securing a reliable stream of retirement income. The good news is that academics and policymakers are discussing ways to help investors (and consumers) avoid the pitfalls that have been created, as Paula Hogan discusses here.

An ongoing argument is whether price momentum strategies work. Traders are quick to say that “a trend is your friend,” while those who adhere to modern portfolio theory argue that price movements are random. An AAII member alerted to me to a study that finds a middle ground between these concepts. You can see the study and learn how chasing short-term price movements fits in with the notion that investors act in a rational manner here.

Finally, this month’s issue includes AAII founder and chairman James Cloonan’s latest commentary on the Model Mutual Fund and ETF Portfolios. James discusses the portfolios’ first-quarter performance and the challenge of picking the appropriate benchmark to compare the performance against. You can see his comments here.

Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


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