my answer to horse625 about MBI and muni bonds

I started a new thread so that I can copy it to my blog.

I read the article you provided (http://bbs.creaders.net/stock/bbsviewer.php?trd_id=320034). It is a good read, thank you.

I think the main point of the article is to get out of treasuries, which I agree. I understand there is a risk in muni bonds since local government\'s income is shrinking. The question is how severe is the risk and is the risk discounted more than enough by current low price of mbi?

There is no single investment that is without risk, just what is the ratio of reward and risk?

I don\'t know if you know the concept of cyclic industry, the best time to invest in cyclic industry is when p/e is maximum or no earnings at all, it means to invest when cyclic industry is at its worst time, no earnings. I think now is the worst time for a muni bond insurer, since it is ready to fulfill its purpose of its life, paying out cash for investors who bought insurance from them. It is the most profitable time for insurers after disaster struck, you probably are not aware that Warren Buffett just opened a business in muni bond insurance last year. After disasters struck, usually insurance rate will go up, so there is a little disconnect here since now MBI can not write new business, I also do not know if price for muni bond insurance went up or not. But still MBI\'s inability to write new business is reflected in its share price as it is one of its main sin.

I am no expert on bond/bond market analysis, but I think CEO of MBI should be. So I follow him. MBI could drop to $1 or under if their loss on muni bond insurance is much worse than the market think, but no one knows the future, it could be worse, it could be better too. Even if it is worse, it may not be the end of story, as long as MBI did not die, it can come back, recover rate of muni bond default is more than 60% historically. Anyway, I am not that smart, I just rely on insiders to do analysis for me.

One little caveat, when a muni bond defaults, MBI is only required to pay the monthly or yearly payment to bond investors, it is not required to take cash to buy out the bond, this is a big difference. Compared to bond, monthly and yearly payment is much less, after a couple of years, when economy is swinging back, MBI will be able to come back to life.

All in all, I am going to listening to insiders, I am willing to bet with them with a big chunk of my portfolio, not with all I have just in case the insiders may go wrong occasionally.

I also intend to trade mbi to capture some profit between market fear and greed. I hope I can be on the other side, be greedy when market is in fear and vice versa.