Don’t go it alone on bonds, commodities
Dear Mr. Berko:
What do you think of municipal bonds from the states of California and New York? Some of them are yielding more than 5.5 percent, and because taxes are certain to rise, do you think they would be good long-term investments? Also, I am convinced that the prices of corn and other farm products are going to zoom, and that this may happen soon. I also think that the cost of metals we use in construction, such as lead and copper, will increase strongly in the coming year, and that oil and precious metals can rise by 20 percent to 30 percent in the coming year or two. What companies can I buy like Exxon, Alcoa, etc., that will protect me against inflation?
R.K., Durham, N.C.
Dear R.K.:
With the possible exception of the general obligation bonds of California or New York state, I “posilutely” wouldn’t touch an excise tax bond, tax anticipation bond, school district bond or water, bridge, road or sewer revenue bond. And I “absotively” wouldn’t touch a hospital district bond, improvement district bond, airport bond or utility district bond. I wouldn’t touch them if they were rated triple-A plus and insured collectively by AMBAC, FIGI, MBIA and the Mafia.
No, I take that back. If those bonds were insured by the Mafia, then I’d buy them in a Sioux City second, because I trust the Mafia’s honor and ability to pay. But I’d sooner trust the devil herself than Moody’s or Standard & Poor’s, whose management ought to be drawn and quartered for villainously violating the public’s trust.
Rather, consider an honest alternative like the T. Rowe Price Tax-Free High-Yield Fund (PRFHX-$10.84), which pays monthly dividends and has an annual yield of 5.19 percent. This $1.9 billion no-load fund has a 10-year average annual total return of 4.98 percent, and the managers know how to sift through the detritus of the soiled and foul muni bond landscape.
As long as President Obama encourages Fed Chairman Ben Bernanke to keep interest rates low, commodity prices will remain stable. Meanwhile, if you want a pure hedge against inflation, don’t buy Alcoa or Exxon. Their values also depend upon management’s ability to earn a profit and pay dividends. And it’s rather risky to buy a contract on oil, copper, wheat, soybeans or gold. But you can, without exposing yourself to management risks, purchase the performance of those commodities through various exchange-traded funds (ETFs).
For instance, rather than purchasing contracts for 5,000 bushels of wheat, you can buy 100 shares of DB Agriculture (DBA-$24.86), which tracks the collective prices of corn, wheat, soybeans and sugar.
United States Oil (USO-$34.89) is an ETF whose price tracks the changes in the cost of a barrel of oil. The iShares of Silver Trust (SLV-$17.46) track the changes in the price of silver. The Lead Trust (LD-$44.41) tracks the price of lead futures contracts, while the Copper Trust (JJC-$41.47) replicates the changes in the futures contracts of copper. SPDR Gold Shares (GLD-$116.64) tracks the price of gold, and the Global Timber Index (CUT-$18.02) tracks the price of timber. So an investment of about $30,000 in 100 shares of each of the above ETFs will closely approximate the future inflation changes in the values of these commodities.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com
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