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"If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation." – The Farmer's Almanac

I said in Part I that I’d answer any questions or comments at the beginning of this discussion, then proceed to a modest proposal for getting all Americans more involved in tax reform.

So – right off, a big hat-tip to SA member Christophe, who commented on my Instablog yesterday, “… I have some munis myself. Here are some the one's I track…

“I was wondering if you could explain why the Eaton Vance Insured Muni (EIM) had a huge dip on June 22 and then came right back up? This was pretty traumatic and ‘forced’ me out of that position... luckily I had purchase EIM in March so no loss.

PML 9.92 -0.05 (-0.50%) 574.88M
EIM 11.84 +0.03 (0.25%) 773.50M
BYM 13.24 +0.03 (0.23%) 342.87M
PZA 22.39 +0.03 (0.13%) 80.46M
HYD 27.73 -0.01 (-0.04%) 0.00
NAD 12.74 +0.07 (0.55%) 504.18M
NPX 11.58 +0.04 (0.35%) 437.11M
NVG 13.23 -0.05 (-0.38%) 395.64M
MHD 13.20 +0.15 (1.15%) 180.61M
MQT 10.80 +0.02 (0.18%) 242.09M
MAV 10.56 +0.10 (0.96%) 244.05M
MHI 11.75 +0.04 (0.34%) 260.63M
NMZ 11.17 +0.32 (2.95%) 264.70M
NMD 10.69 +0.17 (1.62%) 167.67M
PMM 6.13 0.00 (0.00%) 350.38M
PMO 10.17 +0.02 (0.20%) 131.95M
MNP 12.32 +0.03 (0.24%) 121.10M..."


The six muni ETFs I discussed in Part I were researched, analyzed and purchased for disparate client portfolios. I had planned to provide a list for your further research. While I haven’t researched any of these 17 except HYD and MQT, I’d say Christophe has done a great job of providing that jumping-off point for further analysis. Thanks, Christophe!

As for his question about EIM’s dip and recovery, I’m not certain. That was the day of the fund's annual meeting so there may have been some fireworks there, though I find no record of any. Or it could just be that an institution decided to sell because the portfolio manager was in a snit that some college rival was elected that day as a fund trustee. According to BigCharts, volume the trading day before the dip was 81,300 and the day after the recovery, just 91,100. The 239,500 shares that day may simply have been a large seller. More sellers than buyers equals a big down day…

I also appreciate the cautions provided by prairiedog555 and 49er in their comments and am pleased to open a discussion on those cautions. This is important for you to decide upon if you are to buy municipal ETFs!

prairiedog555 said, “Check out PMF on etfconnect.com. This is a closed end fund that trades at a +25.46 PREMIUM. MAB trades at a +9.57 PREMIUM. If you recommend a fund you should disclose important info like that…”
49er said, “PMF is also heavily leveraged which can be positive or negative, but the investor should be aware of this and its implications.”

There is no question that, all other things being equal, it would be more satisfying to buy at a discount than a premium, but that general rule has regrettably become a mantra to many and a crutch to some. For me, “Always buy at a discount” does not replace good research and analysis.

In fact, we need to review the history of the premium or discount, not a static point in time. PMF, perhaps because of PIMCO’s popularity and reputation for safety with many investors, perhaps because they initiated their positions so right that investors don’t mind getting in “late”, perhaps because the leverage 49er refers to offers the potential for outsized gains or losses, or for some other reason (commenters – your thoughts?) has almost always sold at a premium. Since 2006, that premium has hovered in the 20-30% range. As you can see from the complete history of the premium/discount at the company’s website here. PMF briefly dipped to parity on a few dates in 2001, 2003, then – again, only briefly – allowed entry at a discount in 2004 and 2005. Then it was once again “off to the races” except for a short-lived moment at the end of 2008’s sickening slide.

Still, prairiedog555 is correct; I should add the premium or discount or advise you to review the company’s website or seek an excellent third-party purveyor like ETFConnect. That is always my first stop when researching a new ETF or closed-end (but not my last!) After completing my analysis of PMF, I am very much a buyer. I am primarily buying because PMF’s payout has been rock-solid and because its beta (correlation) with the stock market is so low as to be virtually unmeasurable. I’d rather pay a premium for outperformance than think I got a “bargain” by buying at a discount and getting underperformance.

If you want steady income, PMF provides it. If you are willing to ignore the major fluctuations in price, comfortable in PIMCO’s management, you will like it. If you want something negatively correlated to the equity markets, you will like it. If you want something that never moves more than a couple pennies a day, stay away from PMF! As for the premium, it’s traded at a premium 90% of its existence. I’m OK with that. Your mileage may vary.

On to my modest proposal:

Every American should pay some income tax. (I did say it was modest, didn’t I?) When only 62 out of every 100 households (single, married, married filing separately, etc.) feel the pain every April 15th, we create a bifurcated society. I would suggest that a progressive, rather than a flat, tax is still in order. There’s nothing wrong with someone who has enjoyed greater success in life being asked to give back more to the system which created the environment in which that success occurred. (Of course, more and more, we succeed in spite of the system, not because of it!)

But to have almost 4 in 10 Americans – and climbing – not contribute one thin dime creates a voting bloc of people with no skin in the game. Their embarrassing lot is to only take the dole from the system (read: their fellow citizens, even if the check comes from “the government.”) I believe that someone below the poverty line should still have to pay some amount in federal taxes. Growing up, my family was below the poverty line (though, in those unenlightened pre-Great Society days, we were just “poor,” not “poverty-stricken.”) Everybody around us was poor so it felt quite normal. Still, my folks paid taxes. Just as I did, in the most basic entry-level positions.

If someone makes just $12,000 a year, asking them to pay $50 a month, or 5% of their earnings, is a hell of a burden. Good. Good, not because I have no empathy for their situation, but good because that pain will make them feel as if they are part of an electorate that has a responsibility to run irresponsible representatives out of town on a rail. 5% is plenty of pain when 5% makes the difference between a mashed-potato sandwich and being able to split a $5 sandwich at Subway.

Currently, our national government has made a complete mess of the Post Office (while FedEx (FDX) and UPS make money hand over fist,) the VA (while non-profit and for-profit private hospitals provide better service for way less dollars,) Social Security (while my IRAs have eclipsed those SSA returns by a factor of six!) and Medicare, which, being run from a statist, centralized bunker, is being riddled with fraud.

Now that same government is involved in banking, brokerage, making cars, extending (mostly guaranteeing) mortgages, and providing insurance. And now they want to make me believe they’ll do every bit as good a job at regulating the environment via cap and trade, and creating a national health system? Well, yes... given their results above, I’m sure it will be every bit as good.

One of the great things about this country is not that there aren’t poor people, just like there are everywhere else. The difference here is that a substantial number of them are different poor people from year to year. People get divorced and fall into the “poor” category, people lose their jobs, people become drunks or drug addicts, have an accident, etc. But other people and, most often, those same people, a year later, are pulling themselves out of that situation.

If every citizen doesn’t feel the pain of supporting the massive bloated welfare state, I fear we will create a permanent under-class. This nation, by and large, has had a shifting population of those less fortunate than others, with much mobility up and down. It may please the elected, appointed, and anointed elites to know they can always count on that 38% vote, but it does nothing for the cohesion, responsibility or future of the nation.

And what has this to do with municipal bonds? Well, if you agree that this proposal might engender greater personal responsibility and a sense of cohesion and empathy with our fellow citizens, that extra amount collected would go to the national treasury. Since our 535 members of Congress have demonstrated that they will spend every penny that comes in and then, a la Goldman Sachs, leverage those pennies to print more dollars and spend more money yet, the only solution is to Starve the Beast.

It’s up to those who have paid and paid and paid and still, by intelligent investing and frugal living, have something left to invest, to deprive the government of additional tax revenue! States must balance their budget every year; only the national government gets to buy votes with pork from our taxes. Deprive them. Put them on a diet. Put some of your investable dollars into municipals.

Both these actions together won’t stop the downward spiral of dependency and division – but it will slow it down, maybe enough to create a space in which to think clearly. I’d like to leave you with a thought-provoking article once again making its way around the Internet. It was written by Orlando Sentinel journalist Charley Reese – 24 years ago. It’s called “545 People” and it’s about the 545 “leaders” who have asked us for the privilege of, and who now must seize, the responsibility we elected (in 9 cases, appointed) them to fulfill. You can Google it with just the title and his name...

Until we hire 545 who can do that, best protect yourself with some of these municipals…


Disclosure: We are long PMF, HYD, and MYC, and in lesser amounts PRB, MUS and MQT.

The Fine Print: As Registered Investment Advisors, we take our responsibility seriously to advise that, since we do not know your personal financial situation, the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, and it should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Finally, we will always disclose whether we own or are buying the investments we write about.

Source: Think Taxes Are on the Rise? Consider These ETFs (Part II)