The Promised Land or Paradise Lost

By Larry Greenfield

Puerto Rico is a beautiful Island with some of the most picturesque beaches in the Northern Hemisphere.  Having visited there I can tell you this first-hand the weather is beautiful and the hotels offer a place in the sun unrivaled in the United States. I can also tell you that when visiting I have experienced power outages that were definitely not weather related. Puerto Rico has suffered more than their fair share of problems. Heavy debts that have surpassed 70 Billion Dollars and until a recent 3.5 Billion Dollar sale of G O bonds Puerto Rico risked being left down and out.

Interestingly enough, John Paulson the famous hedge fund financier and many institutional investors were heavy buyers of this new issue. Historically, the municipal bond market has been controlled by individual investors often regarded as a largely unsophisticated group that makes investments and holds them for the longer term. They are easily susceptible to screaming headlines, one example being when Meredith Whitney predicted doom to municipal bonds leading to an epic sell off, only to bounce back when her predictions were not met.

President Obama's former Chief of Staff and current Mayor of Chicago Rahm Emanuel was once quoted as saying "You don't ever want a crisis to go to waste." Puerto Rico recently enacted legal Act 20 and Act 22. These measures were instituted to incentivize wealthy individuals and corporations to move to the Island. Should you become a resident of Puerto Rico zero tax rates on capital gains and dividends can be had. Lower tax rates for qualifying corporations are also possible under these new laws. These are 100% legal and I would personally suggest if interested to contact a financial specialist familiar with offshore accounting.

I believe personally in watching the smart money. Being "triple tax free" Puerto Rico Municipal Bonds which in many cases are yielding north of 7% in a globally yield starved investment environment may be just the ticket for some. However, in no way would I make a blanket buy recommendation. Due to the nature of the municipal bond market there are pockets of opportunity in Puerto Rico and I do believe it is possible for some of the bond issues to be restructured. I also believe there will be some issues that will be untouched. In this scenario the emphasis is firmly placed on doing your homework and perhaps there is a small investment to be had in the island bonds to juice up the yielding portion of your investment portfolio.

For the more adventurous relocation to paradise might provide the booty only a pirate could dream of without the risk of swinging (at least physically) from the yardarm should things turn sour.