• The “chess game” of investing…

  • How safe are municipal bonds?

  • The benefits of fixed income…

Dear Reader,

Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.

I hope this week of The Bleeding Edge was useful. Given what we have all been through and are still going through right now, I thought it might be useful for us to look at things through a different lens.

Regular readers of The Bleeding Edge have a clear understanding of how rapidly technology and medicine are advancing. In fact, we also know that the pace of that advancement is accelerating. And because of that, I believe that just about all of us know that things are going to improve.

But for now, in this volatility, there are strategies and approaches that we can take that are better suited for this environment. That’s what I wanted to explore this week with my readers. And hopefully, everyone came away with at least one good idea that they can explore… Perhaps something that just resonated and made sense.

As painful as the first half of this year has been, I remain optimistic. We’re starting to see institutional capital come back into the market. Several asset classes have rebounded strongly off bottoms. And we’re already seeing what I believe to be the early stages of more stimulus. 

If you have a question you’d like answered next week, be sure you submit it right here.

Completing the “wheel”…

Let’s begin with a comment on our essays this week in The Bleeding Edge…

THANK YOU, Jeff Brown, for synthesizing a complete cohesive strategy for this complicated “chess” game we call investing. I am truly looking forward to your next steps in completing the “wheel.” And thank you, most sincerely, for all of your existing investment products, all of which I use in building my current portfolio. You make us all prepared for our bright future! Best regards,

– Mark B.

Hi, Mark, and thanks for writing in.

I hope this week has been useful for readers. I started by sharing a vision of where Brownstone Research is headed… and then wrote about some ways investors can pivot within the current economic environment.

I admit that I didn’t forecast how rapidly things would turn against us in the stock market this year. And I didn’t anticipate that the Fed’s actions would drag down virtually all growth companies to multi-year lows.

And that’s why I wanted to take this week to acknowledge where we are… examine the current situation… and share some ideas about investing in this current environment.

As I shared on Monday, my long-term goal is for every investor to be able to find valuable, relevant research among my research products. As we fill out the “wheel” of diversification, we’ll be looking into areas outside of growth and technology stocks.

This doesn’t mean we’re abandoning technology, biotechnology, crypto, or other higher-risk/higher-reward opportunities. Far from it, especially in the long term. But for the moment, it makes sense to reposition for the more conservative options that are coming into favor.

That’s why on Tuesday, we looked closer at fixed income.

While bonds might not draw many eyes in a bull market like we’ve had the past several years, in the current environment of rising rates, they’re suddenly becoming more appealing.

Convertible bonds, municipal bonds, and U.S. savings bonds can protect our capital – while supplying us with income to eventually allocate into more volatile, higher growth investment opportunities.

Then on Wednesday, we discussed the potential of commodities right now.

I shared my thoughts on gold… and explained why I have some skepticism about its future. Agriculture and energy commodities, on the other hand, look promising due to factors like the war in Ukraine.

And on Thursday, we dove further into hard assets by examining the best ways to play real estate right now.

While investment properties might not be something all of us can – or want – to deal with, real estate is a category we don’t want to dismiss too quickly.

Farmland and timberland offer two compelling kinds of real estate that can offer significant returns. And I shared some ideas on how to make these kinds of investments by taking fractional ownership, rather than needing to purchase an entire farm or forest.

And this week has only been the beginning… We’ll be digging into research for these opportunities – and more – as we seek to provide the best guidance for our readers no matter what the markets are doing.

The two categories of municipal bonds…

Next, a reader wants to know more about the safety of one kind of fixed income…

Project (utility, school, bridges) municipal bonds are generally called revenue bonds and are not necessarily (unless insured) the safest. General obligations issued by the state (if they still do this) are the safest in the opinion of many. If the state (like the Fed) gets in trouble, they just raise taxes. Is this still correct?

– Gordian B.

Hi, Gordian, and thanks for raising this topic. This can be a knotty subject (bet you’ve heard that one before). There is actually a lot of nuance involved, so your question will allow me to dig in a bit deeper.

As a reminder, municipal bonds are issued by state and local governments to finance projects like building new schools, sewer systems, or water utilities.

And you are correct… General obligation (GO) bonds are safer than revenue bonds. What normally happens is that projects that don’t have a clear source of regular income – like consumer payments for power, water, or sewerage – tend to use GO bonds. A school or a town hall would be a perfect example of that.

Revenue bonds, however, are not necessarily risky at all. The key is to invest in revenue bonds that are considered to be “essential use.” Sewers would be a perfect example. Not exciting, I know, but I’m pretty sure that we’re going to continue to use our sewerage systems for our wastewater.

A revenue bond for a golf course, would not be considered essential use. Now, I know that for those of you that are golfers, you might take issue with that statement! But it was only made from the perspective of an investment security. The whole town isn’t going to use the golf course, but they are going to use public water and sewer…

My point is that essential use revenue bonds, that have a clear source of regular income, can be just as safe as a GO bond. And as a general rule of thumb, the municipal offerings tend to be safer than what is done at the state level.

But there is some nuance… in that, every state is not the same. Each state has different rules, and of course, some states run themselves with fiscal discipline… and there are others like California, Illinois, and New York that are complete disasters.

A perfect example is the difference between Missouri and Illinois. A Missouri GO bond is triple A-rated, while an Illinois GO bond is triple B-rated, which is just above a junk bond rating. City bonds also have the same rating structure.

These ratings and the underlying projects are critical inputs into determining which bonds to invest in and which to avoid. And this is exactly the kind of research that I’d like to provide for my subscribers so that they can avoid the junk, and only allocate to the best quality bonds for their portfolio.

An attractive approach to investing now…

Let’s conclude with a comment on fixed-income options…

I just read the clip on the change from tech stocks to convertible debt. It seems to me when I was a broker 19 years ago, I helped older clients with this approach. It gave some stability to receiving a predetermined income while being able to get the security of the bond or to convert to the underlying stock!

Interestingly, now that I am 84 years old, I find that attractive to me adjusting my portfolio of stocks. Thanks, Jeff, for suggesting this approach. Sincerely,

– Gloria S.

Hi, Gloria, and thanks for sending in your note. Your story is a perfect example of how our investing interests and goals can change throughout our lifetime, as well as due to the market environment we find ourselves in.

Every once in a while, convertible debt is a very attractive investment class, even for growth investors. And it is always an attractive asset class for those who simply want preservation of capital, with income and some upside potential.

Fixed-income investments have suddenly started piquing interest once more as interest rates increase and volatility continues in the stock markets. This is natural. And we’ll be taking a close look at convertible bonds in Exponential Tech Investor for the very reasons you mentioned.

These investments offer the greater security of bonds, while still letting us gain exposure to promising tech companies. Protecting our capital is important in the current environment, so this is a good way to temporarily pivot from strategies that work in healthy markets until the situation changes. (Paid-up readers can catch up here.)

And as I explained on Tuesday, there are a handful of fixed-income opportunities that we’ll be taking a closer look at…

Municipal bonds and Series I Savings bonds are finally offering yields that should draw investors’ eyes.

In the case of I Bonds, we can earn 9.62% on our money at the current moment… That’s fantastic.

And even with municipal bonds, their tax advantages enable them to provide significant returns right now.

I know it’s never fun to see markets pull back… especially when it means many of our growth stocks have been punished.

We don’t need to duck and cover though… there are positive actions that we can take. And right now, I believe this requires us to look outside our usual scope of recommendations.

And never fear… Here in The Bleeding Edge, I’ll continue to share some of the most amazing technological advancements happening – even amid the market turmoil.

The reality is that nothing has changed amidst this volatility. The pace of advancement continues to accelerate, and that means that there are good things to come.

Once the current uncertainty and volatility subside – as it eventually will – many growth companies will take off, and valuations will increase dramatically as money floods back into the stock markets.

That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.

Have a good weekend.

Regards,

Jeff Brown
Editor, The Bleeding Edge

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