Money Rehab with Nicole Lapin - We Built This City (on Muni Bonds)

Episode Date: July 8, 2022

In this episode, Nicole brings back Wall Street veteran Gary Kaminsky to talk muni bonds and Gary’s VIP ETFs.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today we're talking investments.

And yes, just because the economy is going through a rough patch doesn't mean we should stop investing. It's important to understand that recession does not mean financial hibernation. It means staying up to date on the changes to the financial environment so that you can make small tweaks to your plans as needed. So let's double click on that financial environment. And to help us do that, we're bringing back Wall Street veteran Gary Kaminsky. If you missed the first part of our conversation, which was episode 338, are we back to 2008? Check it out. Although you don't have to have listened to that episode to

listen to today's episode. In this episode, we're going to talk about municipal bonds and popular ETFs and index funds. So let's get right into it. You also sent me a text that you like muni bonds. Well, it's funny. Had we done this two weeks ago, I would have told you that this was the most attractive time for somebody to invest in municipal bonds since the financial crisis. You remember there was an analyst? Yes. What's her name? Meredith Whitney.

Yes. Remember she used to be on with Maria all the time? And she would come on and she gave in the financial crisis, they would put her on TV like every week. And she did a thing on 60 Minutes. Yeah. Because she predicted. And she did a thing on 60 Minutes. Yeah.

Because she predicted. Well, she had had a good call, a very good call on Citibank with the financial crisis. I think that's what it was. It was about Citibank and the financial crisis. Then she went on, like a lot of these very famous analysts do, they get well-known for making a big call. Yeah, like Nouriel Roubini or whatever. And John Paulson. They start making all these other calls.

And so Meredith then started to say there's going to be a massive municipal bond crisis. 60 Minutes put her on. There was a whole segment. Oh, it did a whole series. They said states were going to go bankrupt. States of pain. Right. States were going to go bankrupt. Barons.

She had all things on Barons. She had all the umbarance. For me personally, having never owned a municipal bond before, when the yields got to a level where on a tax adjusted basis, for those that are listening, municipal bonds, very tax advantage, no federal tax, no state income tax if you buy the bonds in the state you're in. So if you buy a bond that's got a 4.5% yield, municipal bond in a taxable account, that's almost equivalent to a 7% return because you're not paying the taxes. So, muni bonds just say it plain, like they're bonds that you get from your city or your state or local governments. Correct. Correct.

Versus a treasury, which is a national government. Correct. And correct. And so, all the states have various different public works projects that are financed. Here we are in New York City. If you go through the Triborough Bridge. Yeah, they need to build a bridge. You go through the Midtown Tunnel. They issue bonds. They issue bonds to run the –

To paper stuff. To build the infrastructure and then you get paid based on the – every time everybody comes in and out of the Midtown Tunnel, they're paying, that money goes to the bondholders. So I told you when we were texting that how could individual investors participate? So there is an ETF, MUB. It's not a perfect – like all of these ETFs, it's not perfect in terms of replicating, buying the actual municipal bond. But if you look at the chart, it's been quite a correction, just like everything else in fixed income in the MUB this year. It looks like interest rates have stabilized, at least in the short term. You've had to move down. And the MUB is a good way for

individuals to participate if they don't want to actually go out and buy bonds to have an asset allocation into the space. So how do you actually buy, let's say you live in LA, how do you buy the muni bond just directly without an ETF? Would you suggest that to retail investors? Well, again, that's where you really need to work with a professional. But you are a professional. No, no, you need to work- You just play one on TV.

No, no, no. You need to work with a professional. Who knows your- No, you're right. I'm not active because- Who knows your whole spiel. Well, because I'm going to tell you why. As it comes to municipal bonds, you have to understand two things.

You've got to understand the credit quality of the bond, meaning that you've got to have- This is where Wall Street Research actually is worth the investment. Because when you're buying a municipal bond, you want to make sure- If you're buying a bond, you want to make sure you're going to get your principal back, the money you put into the bond, as well as your interest payments. You want to make sure you're going to get your principal back, the money you put into the bond, as well as your interest payments. So you need the research – you need the work of the research department to understand the credit quality, meaning is this – is the MTA, which is running the municipal subway system in New York City, do they have the finances in order such that they will be able to pay you back as well as pay you the coupon, the dividend payments, the distributions? You bring up a really good point about credit ratings because you think you want a better return, right? But the higher yield and the higher return you get, it means the shittier the lender potentially could be, right? They have

to give a higher return if there's a greater chance you'll never get your initial investment back. See, I didn't realize on radio we could talk like that. So this is great. So to take your analogy even further, if you buy a high-yielding bond because you think, oh, why would I want to buy a bond that's yielding 4.5% when I could buy something that I could get something that's yielding 12%. Well, the likelihood that it's yielding 12% if it's a similar business or a similar investment is because you're most likely to get fucked because the company can't – these are the type of companies that will get most impacted in a recession. That's right. Okay.

So where else can we put our money during these crazy financial times? For most individual investors that are looking to sort of take advantage of what's happening right now, the probability is the greatest diversification you'll get is to an index fund. And whether it's the S&P 500 or the – I don't think – by the way, I don't think – let me tell another fallacy out there. It's going to get a lot of hate mail probably for this too. The NASDAQ QQQ, given the huge size of the largest companies that make up that index, is really not an index.

I mean, it's sort of like a lever technology bet. Yes, I know there's some other companies in there, some retail, some biotech. But I'm not sure QQQ is really a diversified index. So, what do you like, SPY? Well, I think SPY, the SPY, the S&P 500 or the Vanguard Index Fund, certainly the Russell 2000 is going to do that much better in terms of being more domestically focused. I do like – I did mention to you one other ETF. Devo. Devo.

D-I-V-O. mentioned to you one other ETF. Devo. Devo, which is another enterprise that I sit on the advisory board of, for full disclosure. But the reason why I'm working with them is because I've really gotten to know the managing partner and the general portfolio manager there, Kevin Simpson, over the last several years. And having been in his seat and seen the way he's managed the portfolio, what he does is he does active research to buy large cap dividend paying stocks. And I've already told you why I like dividend paying stocks. But on top of that, he's got a covered call strategy where in a time like we've just had the last six months, in addition to the portfolio, where you're getting the dividends, you're getting the coupons that are coming in, even though the stocks are up and down with the market, he also sells options.

So maybe you want to explain what a covered call is, or I can explain. If you own Apple, for example, and you have got a big position in Apple, but you want to take in some incremental income. You sell out of the money. So if Apple's trading at 140, you'll sell a call, an option that somebody can buy Apple at 170. And he actively manages the portfolio where he sells covered calls against the position when the stocks are moving higher and you're going to collect the extra premium. And so, for example, this year, because of the covered call strategy, this portfolio is outperforming the S&P by almost 1,000 basis points because you're collecting the insurance premiums, the covered call strategies,

which are actively being managed. And there's a lot of strategies out there. 1,000 basis points being 10%. Correct. Well, if the S&P is down, you know, I'm not day-to-day. S&P was down 21%. This strategy, I think, was down, the overall strategy when the S&P was down at the low of 21%, the strategy was down 9%. So it was actually more than a thousand basis points

at the time. But covered calls, don't try this at home. Say again? Don't try the covered calls at home. I just saw some like personal finance book that came out talking about covered calls. No. No options. Again, let the hate mail come my way. You can handle it. For 99% of individual investors, if they trade options, they will lose money. Does that sound like good odds? I don't like them. I mean, you've got a couple of issues here. It's hard enough. I used to talk about at Newberger,

one decision stocks and two decision stocks. A one decision stock is a stock that you buy and you could hopefully hold forever because they're going to grow the dividend, they're going to grow the business. Pre-pandemic, one of the greatest one decision stocks I used to talk about, boring as hell, Clorox. Now, Clorox became with the pandemic a massive- A hot bell at the stock market. How do you pronounce it? You know, meme. It became a meme stock, right? I never pronounce it correct, right?

But Clorox, you know, Clorox for 50 years was like a steady 8% to 9% earnings growth, dividend growth company, one decision stock. Public storage, you know that company? Public storage. You see them everywhere. Totally. One decision stock. Does well in recessions, does well in growth economies, growing the distribution. They were boring one decision stocks. The problem with options is it's a

two decision thing every time. You've got to make a decision that you want to buy an option on a stock and then you've got to time it right because the option value decays the minute you buy. You know like when you buy a car, they tell you, I don't know if it's actually true, but I think my mother told me this. Shout out to my mother. My mother said, when you buy a new car, it goes down in value like 30% the minute you drive out of the dealership. Have you heard that before? Mom is right. Is that true?

Yes. Is that really true? The first four years is the greatest depreciation period. So, if you're going to buy a used car, buy one that's four years older, older. Okay. So if that's true that the minute you buy a new car, you've already lost money on paper. If you buy an option and you buy a call option or a put option, chances are the minute after that transaction has happened, if you try to resell it let's call it five minutes later, you're probably – because the time value of money is already

down five minutes, you've already lost money on paper. Now, that's not to say that if you buy a call option and for some reason, the next day the company announces they've discovered the cure of some major medical issue, you're going to make a lot of money. But for most people, buying options as an individual investor is very difficult because you've got to get two things right. You've got to get the fundamental thesis right, and you've got to get the timing right. There's many times that I've actually witnessed professional investors buy options in a security to get the fundamental story right. But because they bought call options that are going to expire, let's call it a mid-August, and the fundamental issue that they were looking for didn't take place until September, and the options expired in August,

worthless. So it's very difficult. It's two decisions, fundamental work rate and timing rate. For today's tip, you can take straight to the bank. Even in these scary market times, my recommendation is still index funds and chill. OG money rehabbers will remember that when we are in a bull market, I recommend index funds. Now we're in a bear market and I am still recommending index funds. Again, recession does not mean financial hibernation, so stay engaged in your financial planning and you'll get that sweet ROI. recommending index funds. Again, recession does not mean financial hibernation. So stay engaged in your financial planning and you'll get that sweet ROI. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan

Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.