Buy Lines, Part 2

Buy Now! What? Part 2

As we embark on second day of investment suggestions, some readers might want to reach for the No Doze. Prepare yourself as we enter the world of closed-end bond funds.

What? Closed-end bond funds (is there an echo in here?)? Despite the name, they are stocks of investment companies. Why? Because they're cheap, trading at a discount to both NAV (which may sound like a post-punk techno band -- New Angry Visigoths? -- but really stands for "net asset value") and to U.S. Treasury bonds. (For more definitions/info, check out The Internet Closed-End Fund Investor).

How cheap are they? At the end of July, closed-end muni bond funds were trading at an average 2.7% discount to NAV, the biggest spread since May and the second-biggest since May 1998, according to Chris Bouffard, closed-end fund analyst at Lipper Analytical Sevices. The average market yield for all muni bond funds was 5.96% at the end of July, about on par with Treasuries, he said -- until you take into account munis' tax-exempt status, that is.

"Essentially you have a double whammy," said John Bollinger, president of EquityTrader.com in Manhattan Beach, Calif., referring to the bargain created by the discounts to both NAV and Treasuries.

While Bollinger offered no specific picks, Sam Ginzburg, managing director of equity trading at Gruntal, did. Nuveen Muni Value Fund (NUV Quote), Muniyield Insured Fund (MYI Quote) and RCM Strategic Global Government Fund (RCS Quote) all look attractive to the trader.

"I haven't seen these things this cheap since 1994," he said. "If we do turn around in the bond market, you have a trade for the short-term trader and an investment for the long-term investor."

The likehood of a turnaround is debatable, but these closed-end funds were trading at discounts, nonetheless. As of Friday, the aforementioned were trading at discounts to NAV of 10.7%, 7.7% and 16%, respectively; wider than their average discounts of 5.6%, 2.9% and 14.4% in the past year, according to Bouffard.

Mariana Bush, closed-end funds analyst at Everen Securities, favors the Municipal Advantage Fund (MAF Quote) and Van Kampen American Advantage Muni Trust II (VKI Quote).

The former was trading at a 10.6% discount to its NAV at the end of last week; the latter at an 11.4% discount vs. yearly averages of 8.9% and 9%, respectively.

Bush offered additional advice for closed-end muni fund investors: Rather than as a "bet" on interest rates, focus on the credit quality of the fund's assets, call risk, leverage (or lack thereof) and stability of dividend.

Did we mention these funds pay a dividend? Not that most investors care about such things these days.

Without passing judgement, Bouffard noted discounts in closed-end muni bond funds are also a function of the fact there's been more IPOs in the sector this year than any since 1993 and more than the past five years combined. And the industry doesn't time the market so well. The last big push of supply came just in time for the bond market's "debacle" in 1994, the analyst noted.

TV, or Not TV

Tons of emails from last night's "report card" on guests of the TheStreet.com's TV show.

First of all, let me say that I love our show, especially when I'm on it. Moreover, I love it because TheStreet.com is the kind of organization that will hold its guests accountable, unlike some other financial news outlets whose reporters seem more interested in hob-nobbing with the "Masters of the Universe" than with helping you make money. If that makes us the bad guy (Skeletor, that is) so be it.

But those who look at the report card and think "those guys are idiots, why should I listen to them?" are making a grave mistake. The point of the report card -- in my humble opinion -- is to demonstrate that investing is NOT simple. Even pros like Robert Friedman with great long-term track records foul up from time to time. The question is how to minimize the damage and preserve capital. (It's a concept often obscured by the sheer power of this bull market.) I would have asked Friedman about that yesterday if he'd called me back; I still hope to reach him at some point.

There's also the issue of relative performance. When TSC's show first aired on July 17 -- I'm including our Lost Episode -- the S&P 500 was at its all-time high of 1418.78. Since then, it's traded as low as 1267.73 on Aug. 10 and as high as 1382.80 on Aug. 25. It fell as low as 1306.96 today, before closing at 1320.41.

So it's not like those stock pickers have been swinging and missing in slow-pitch softball. The market is like Randy Johnson right now, and it's peeved about the "losses" it took earlier in the season when it pitched well but got no offensive support. Got to view those stock picks in context.

Eureka!

Now I know what to do whenever I write something that offends somebody (which seems an almost daily occurrence). I'll just say that that particular line was inadvertently released a day early. If it's good enough for the National Association of Purchasing Management (not to mention the Labor Department), it's good enough for me!