“Safe Harbor Investment Covenants”

By Travis Johnson, Stock Gumshoe, October 24, 2008

Today’s ad that will receive the Gumshoe treatment is for Steve Christ (no relation, I assume) and his Wealth Advisory newsletter … and yes, like so many others these days, it is focused on words like “safety” and “guaranteed.” Exactly the tonic that the panicked investor demands.

Now, this particular newsletter will only run you $79 a year, so you can go ahead and subscribe if you feel like it — as with so many of these “introductory” newsletters I assume they also use it as the target of constant upgrade offers for their more expensive services, but that doesn’t mean it isn’t any good.

But if you just want to figure out what a “safe harbor investment covenant” is, well, you’re in the right place — just read on, it won’t cost you anything.

First, let’s see how they “sell” this idea …

“I made an average of 28.2% profits without investing in a single stock… and by taking advantage of
tax-free investments that provide guaranteed return of principal.

“URGENT: In the next few moments, you’ll learn why it’s critical you use this tool – starting today – to safeguard your wealth from its two greatest threats: another market crash…and excessive taxation by the U.S. Government.”

It sounds pretty good, no? It gets better, just you wait …

“This powerful – but often overlooked – investment vehicle not only allows you to grow your wealth, but it also allows you to…

“Keep your money out of the U.S. Government’s hands by taking advantage of tax-free investments…
Earn both a steady stream of income AND a high rate of return…

“Rest easy with the knowledge that, in many cases, you’ll be taking advantage of investments where the principal is 100% guaranteed.”

So I know you’re asking, “where do I sign?” Give me a moment here, I’m just getting started!

Tongue firmly in cheek, one assumes, Steve tells us about the one “catch” …

” … in order to take advantage of this powerful investment vehicle, you must be willing to stay away from potentially dangerous investments like stocks or mutual funds.”

Hmph.

And he makes the point over and over that Warren Buffett, Bill Gross, and Wilbur Ross are all invested in these “covenants” — and if all those smart, rich guys do it, it must be good … no?

Lots of quotes from newspapers, too, to give this newsletter a little touch of their gravitas …

“The Wall Street Journal reported that ‘large investors are snapping up these investments.’

“‘Investing in (Safe Harbor Investment Covenants) is a no-brainer,’ according to the Washington Post.

“Forbes said that Safe Harbor Investment Covenants are ‘the non-volatile safe haven where investors can get a stable and reasonable return with little risk.’

“The Minneapolis Star-Tribune called Safe Harbor Investment Covenants ‘dependable and tax-free to boot,’ while the Milwaukee Journal Sentinel summed it up this way: ‘Amid the stock market’s turbulence… an island of calm.'”

So what are we dealing with here?

You guessed it: Municipal Bonds.

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Sounds a little less sexy than “safe harbor investment coventants,” doesn’t it?

Municipal bonds are a way for you to lend money to state and local governments, or to projects that are underwritten by those governments. They come in all different stripes, types, and sizes, and there are indeed plenty of very well-respected investment honchos who have been shouting about munis at the top of their lungs over the last few months.

I’m not particularly an expert in muni bonds, and have never invested in them myself, but I have looked into them from time to time. I even wrote about them early this year, when a different newsletter teased them as offering a “Virtual Florida Retirement” … so this is what I can tell you:

Municipal bonds are tax free at the federal level, and in some states that state’s bonds are also not taxed. This means that, all else being equal, a municipal bond should have a slightly lower interest rate than a treasury bond, to compensate for that tax-advantaged status.

Of course, all things are not equal — and while it’s extremely rare for municipalities to default on their bonds, it’s also undeniably true that in a “flight to safety” trade as we’ve seen in recent months, the “absolutely safe” investment of treasury bonds is more valuable to investors than the “probably safe” municipal bond. So if you agree that municipal bonds are irrationally cheap thes