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Weekend Edition

Where to collect tax-free, double-digit income streams
Saturday, November 16, 2013

 The ultra-wealthy are fleeing from paper money...
Inflation drives up the prices of collectibles, like fine art, fine wine, and watches. The wealthy want to get out of paper money... Buying a painting by Picasso or a wine from the legendary French vintner Petrus shifts them from dollars to rare and globally recognized assets. And the ultra-wealthy are always looking to acquire more of these.
Recently, a 1969 Rolex Daytona sold for a record $1.1 million at a Christie's auction in Geneva. It's the most ever paid for a Daytona at a public auction. And it's close to the record $1.16 million paid for any Rolex, which happened at another Christie's auction in May.
In total, the watch auction raised $13.2 million – four times the presale estimate.
For the world's elite, these rare and globally recognized assets are always in demand.
 But the Rolex was just the beginning...
This week, auction house Christie's announced a rare Patek Philippe watch sold for a record $2.2 million. In total, the watch auction brought $43.9 million – the highest for any watch auction in history.
 And it's not just watches. Fine art is breaking auction records, too...
A 1969 triptych by painter Francis Bacon titled "Three Studies of Lucian Freud" sold for $142.4 million at a Christie's auction this week – the highest price ever paid for a piece of art at auction. You can see an image of the work in this New York Times article.
A sculpture by contemporary artist Jeff Koons, "Balloon Dog (Orange)," sold for $58.4 million – an auction record for a living artist.
In total, the art auction totaled $691.6 million – smashing the previous record of $495 million Christie's set in May.
 These huge prices can be partly attributed to the record amount of money in the world today and people's lack of faith in paper money. But the wealthy also amass collectibles for another reason...
Owning collectibles offers one major advantage – one that I think drives 90% of the demand for collectibles: It's a great way to protect your wealth from the IRS. People know that when they die, the IRS won't have any idea what is hanging up on their walls or hiding in their vaults. So they hide money in these trophies to give to their children to avoid estate taxes. Mind you, I'm not passing judgment on these actions, nor am I recommending them... I just believe that's why a lot of demand for collectibles exists.
Collectibles are also easily transferrable across borders. You can take a Picasso on a private jet and move $100 million offshore. And no one even knows you have it.
If we ever reform the estate tax system... I think demand for collectibles could dry up overnight. But I'm not holding my breath.
I don't expect the government to reduce the estate tax system. If anything, it will make it worse. But I think people should be aware... When you buy collectibles, you're betting on the irresponsibility of the government and the wickedness of the tax system... If the government gets more irresponsible and the tax system gets more heinous, you'll probably do well. And I think that's a good bet. But you should understand that's what you're betting on.
 If you're looking for another way to shield some of your wealth from the IRS, but buying multimillion-dollar pieces of artwork isn't in your cards, we have another option for you...
Dr. David "Doc" Eifrig has long espoused the benefits of investing in municipal bonds. Issued by state and local governments, these bonds pay healthy, tax-exempt yields to creditors. "Muni" bonds have sold off recently as investors feared increased defaults (following Detroit's bankruptcy and worries of a default in Puerto Rico) and general bond-market disruptions due to rising interest rates.
But Doc thinks fears of the sector are overblown... And munis are one of the few places you can collect double-digit income in today's market. He explained why he's bullish on muni bonds in the October issue of his new Income Intelligence service...
Back in 2010, Wall Street analyst Meredith Whitney predicted a full-blown collapse in the municipal-bond market.
Whitney, who gained fame in 2007 after correctly making a bearish call on Citigroup, told 60 Minutes that she expected to see 50-100 significant municipal-bond defaults... adding up to "hundreds of billions of dollars" in 2011.
Given that the previous record for defaults was $8.2 billion in 2008, Whitney's claim spooked investors. Investors couldn't sell fast enough, as $30 billion fled the muni-bond market. Over the next few months, some of the safest municipal-bond funds fell 15%.
But Whitney was dead wrong.
Defaults totaled $2.6 billion in 2011 (and $1.7 billion in 2012), even less than the $2.8 billion in defaults in 2010, prior to Whitney's call... and hardly a crash for the $3.7 trillion muni-bond market.
Our Retirement Millionaire readers ignored the doom and gloomers... We held onto our muni-bond funds and pocketed tax-free money.
You see, we knew something about muni bonds that folks like Meredith Whitney don't know... It's a common misperception that leads most investors to mistreat these bonds...
Anyone who followed Whitney's call missed a big 23% rally in muni-bond funds over the next two years.
The truth is, municipal bonds rarely default. They are one of the safest places investors can put their capital.
Investment-grade municipal bonds (those ranging in grade from A to triple-A) have had a default rate of only 0.017% over the past 40 years, according to Forbes magazine. In other words, less than two out of every 10,000 investment-grade municipal bonds default.
 Recently, hedge funds have started to recognize the value there... and they're piling in.
Whether that's a good thing or a bad thing has yet to be determined – though they are providing liquidity and requesting more disclosure from issuers. But their presence in the $3.7 trillion sector is a major shift. According to the Wall Street Journal, this institutional money is buying everything from discounted Puerto Rico debt to highly rated bonds from Stanford University.
Hedge funds now hold billions of dollars' worth of municipal debt, up from almost nothing five years ago.
 Even though new money is entering the market, Doc thinks you can still make big profits in the sector. He recommended a municipal-bond fund in Retirement Millionaire in 2011. His readers are sitting on gains of nearly 25%. But it's still one of the best places to collect big income today. Doc explained the municipal-bond market as an income-producing asset in last Saturday's Growth Stock Wire.
 Doc has developed a set of strategies he calls "trading for income" that you can use to increase your portfolio's profits by thousands (even tens of thousands) of dollars... It's a way to time the entries into your income positions to maximize your yield.
Doc has several different and easily tradable assets he likes to recommend for this strategy. And right now, he says municipal bonds are a buy... The muni-bond fund he recommended in last month's "beta" issue is already up 5%. But it's still trading at a 3.7% discount to its net asset value. And at current prices, it's offering a tax-equivalent yield of nearly 10%.
You can learn more about Doc's "trading for income" strategies – and how to gain access to his muni-bond recommendation – here.
Sean Goldsmith

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