Michigan munis getting a bad rap?

Investment advisers say that despite the state's history of economic turmoil and ongoing risks, Michigan-issued financial products represent a good opportunity for invetors.

For example, "Michigan Municipal bonds are being painted with a broad stroke, while important and positive aspects of the bonds are going unnoticed,” says Leon LaBrecque, managing partner and founder of LJPR, LLC, a Troy-based firm managing more than $350 million in assets.

With the turmoil in the markets, LaBrecque and business partner, Brad Reynolds, CFA, have observed a historic shift in the premium on municipals, particularly Michigan munis.

Munis are selling at a vast premium to Treasuries," he says. "We think this premium is unusual and provides some opportunities." Following are some observations from a new white paper detailing what LaBrecque terms the "real story" on MI Municipal Bonds:

-- There is apparent mis-pricing of risk in Michigan munis. The entire market is being painted with one broad brushstroke. Michigan, as I can attest first-hand, is a very diverse state in geography and economy.

-- Ratings are helpful, but not determinative. We’re carefully looking at the issues and the municipalities individually.

-- The muni insurers are in turmoil. In fact, many of the insurers are junk status themselves.
Tax rates are going up for many investors, and this makes munis more attractive. Of particular interest to me is the Health Care Bill, which adds a 3.8% Unearned Income Medicare Contribution tax on dividends, interest and capital gains in 2013. Muni interest is exempt, making the tax-equivalent yield even more attractive to high bracket individuals.

-- The interest rate environment is unique. The yield curve is at a record steepness, and we see opportunity while staying reasonably short as protection against inflation.

-- Quality is king. With most munis priced the same, a savvy analyst can find very strong issues providing yield very similar to those that deserve a risk premium. There appear to be quality good yield issues.

-- Liquidity is queen. Municipalities are facing revenue crunches, probably in the magnitude on and average of -10- 15% for 2011 and 2012 and maybe longer. They need money and will borrow. We think BABs are a short term solution to the liquidity issue.

-- The market is dislocated and somewhat inefficient. We are seeing ‘fire-sale’ prices on some issues. In addition, we see that the lack of a central unified market presents opportunistic buying. We buy on the bid (wholesale) for our portfolios: the spreads tend to be pretty big now.
To view Leon’s and Brad’s entire White Paper, click here. To view their current executive summary of the Michigan Municipal Market, click here.

LJPR, LLC is an independent wealth management firm headquartered in Troy, MI. For more information about the firm, including the firm’s blog, visit their site. Leon C. LaBrecque is an attorney, CPA, CFP®, and CFA (Chartered Financial analyst). Leon is CEO and chief strategist for the independent wealth management firm, LJPR. Brad Reynolds, CFA is a partner in the firm and the firms’ chief investment officer. Together, Leon and Brad have been analyzing and investing in (to the tune of about $100M) individual Bonds, particularly Michigan municipal bonds. Leon LaBrecque’s direct e-mail is leon.labrecque@ljpr.com. The Firm’s telephone is 248-641-7400.