Call it a "muni bond market showdown."
In one corner, you have Mr. Market himself. He's a composite of stock market participants from mom and pop sitting at their computers, speculating on everything from Netflix to the Double Short Euro ETF, all the way up to massive Wall Street mutual fund houses like Fidelity and Vanguard, whose managers try to earn bonuses by tracking some index or other...
And opposite them, you have Interactive Data, a company that prices municipal bonds (among many other services). Muni bonds need this type of service because most of them are illiquid.
They're having an altercation, and Mr. Market is winning.
According to information from this week's The Bond Buyer, buyers of the muni bond ETF understand muni bond valuations better than the math whizzes at Interactive Data.
Muni bonds are notoriously illiquid. But bond salesmen need a price they can quote to their clients. So they hire Interactive Data to provide one for even the most illiquid bonds. If you're a bond broker, you don't want your clients calling up asking why their investments are tanking. You want to tell them everything is OK. So Interactive Data has a strong incentive to skew its pricing upward.
I'm not saying Interactive Data is dishonest... just that valuation is not a science, and Interactive Data probably sees the glass as perpetually half full.
But if you're a retired person living on a fixed income, you can't afford this kind of nonsense. The price is what someone will pay right now, and that's often lower than what Interactive says it'll be. So when Meredith Whitney goes on 60 Minutes and says there'll be thousands of muni bond defaults, you don't wait around. You sell pronto, first thing the next morning, no matter what your broker says.
This situation is why the iShares S&P National AMT-Free Municipal Bond Fund (MUB) underperformed its benchmark index by about 1.4% in the fourth quarter. In other words, the ETF price said the muni bonds were worth less than the underlying index. The underlying index is filled with prices from services like Interactive Data. Real buyers and sellers price the ETF, minute by minute.
Which one would you trust?
If not municipal bonds, which are traditionally viewed as a safe-haven asset, where should you put fresh money? We'd recommend having some money in gold and silver while the latest bond crisis plays out – particularly silver, which is relatively cheap compared to gold.
If you're looking for a way to buy physical silver with hardly any premium, we suggest you read Retirement Millionaire. Editor Dr. David Eifrig – or Doc, as we call him – discovered a way to buy physical silver for as little as $2.08 (with almost zero premium over spot price… normally premiums can run between 25% and 50% for certain silver coins).
Doc detailed his strategy in his report, "How to Buy U.S. Government-Created Silver for $2.08." Learn more about this little-known strategy for investing in silver here…
What else are we buying? It's difficult to buy anything with conviction when valuations are so dear. Stocks are soaring. Commodities are soaring. Bonds are soaring (meaning yields are falling). Looking across all markets, we still find one undervalued asset... natural gas.
And we're not the only ones. According to the Commodity Futures Trading Commission's weekly Commitments of Traders report, hedge funds and other large speculators nearly doubled their bullish bets in natural gas futures – the biggest increase since January 2010. The hedge funds are making a short-term bet on cold weather boosting natural gas demand for heating. S&A Resource Report editor Matt Badiali is taking a more macro perspective...
Natural gas is so cheap right now because the world has tons of it. But we're going to use a lot more. China recently reported it imported 30% more natural gas in the first 11 months of 2010 than the same period in 2009. And as Badiali points out in his current issue, the U.S. government is "going green." He notes the cash incentive to get 1 million electric cars on the road by 2015.
As the world consumes more electricity, we'll need more natural gas (the U.S. generates about 24% of its electricity from nat gas). It's the perfect time to buy huge reserves of gas and wait... Eventually prices will climb. And as Badiali says, "right now, the stock market is giving away natural gas."
In his latest S&A Resource Report, Matt recommends one of the largest owners of gas reserves in the world (only majors like ExxonMobil and ConocoPhillips own more). The stock is cheap, shareholder-friendly, and pays a safe and inflation-proof dividend. Its vast portfolio of undeveloped reserves also act as a large "call option" on rising gas prices. Even if gas rises 25% from these levels, the stock will enjoy a huge uptrend. To learn more about this idea, click here...
Editor's note: The Weekend Edition is pulled from the daily S&A Digest, produced by Stansberry & Associates. The Digest comes free with a subscription to any of our premium products. To learn more about our research, including a way to buy government-created silver for just $2.08, click here.