This Week In Bonds (Week Ending 5-21-2010)

The impossible became more than possible this week, folks, it became a gigantic hump of steaming reality thrust unpleasantly into our faces. But since we're all rational pragmatists around here, it's time to take a look at what happened last week and see how we can apply it to next week.

1. Municipal bonds are not bulletproof. As we all discovered with the Las Vegas monorail bond disaster, ratings are just ratings, and not guarantees. There are still plenty of great bonds to be had, and the takeaway lesson here is to be diverse. One AAA bond may collapse, TEN of them collapsing at the same time is ten times (or more!) more unlikely. The old saw about putting all your eggs in one basket comes to mind here, even if that basket is steel-lined.

2. The SEC is either in full Danger Mode or so incompetent it's not worth discussing. You remember how we talked about Schroder's? Those incidents happened almost two full years ago, folks. If the SEC is coming down on a guy two years after the fact, something's up. But considering how they got slammed in the media for their massive porn habit, they may be looking to make a name. Keep your eyes front.

3. Good deals can be had in unexpected places. Even as a AAA muni bond went toes up, Ford's (NYSE: F)bonds went up on the increased likelihood of better profits ahead. They're paying out huge amounts of dough, folks--better than seven percent!--so they might just be worth your time after all.

4. Europe is still a disaster. I would be extremely hesitant about parking any cash in Europe until some of the smoke clears. They're still rioting in Greece, for crying out loud! This might be a time to be a speculator--disaster is good business in a lot of businesses--but betting the farm on this might get the farm repossessed.

And this week's big takeaway lesson:

5. Diversify, diversify, diversify. I've said it once but it bears repeating sufficiently to get its own bullet point. The more spread out your money is the less likely you are to lose it. Vegas' AAA bond goes toes up while Ford's miserable B bond goes BB? It's not rational. It's not logical. But it happened. And if you sufficiently diversify, you can take better advantage of the markets' sheer irrationality.