From Bank of America-Merrill Lynch comes investment strategy in the form of '10 themes for 2010.' Keep in mind that these represent BofA's opinion so take everything with a grain of salt. The bank feels that next year will be "a genuine watershed" in that it will reveal whether or not this 'recovery' is real or whether the fundamentally drawn out weakness typically associated with bear markets will rear its ugly head.

BofA's Research Investment Committee thinks that the printing of money through quantitative easing and record budget deficits will help the country on the road to recovery but thinks inflation will remain low throughout 2010, thus providing a bullish environment for stocks and commodities. As with many other market pundits, BofA analysts feel emerging market demand will fuel commodities (especially gold). On the contrary, they dislike government bonds. The 'top 10' theme seems to be prevalent out of Bank of America-Merrill Lynch lately as we also recently covered the top ten stocks owned by hedge funds.

I have really started to dislike municipal bonds as an asset class. They have seen a huge rally along with almost every other financial asset but the underlying fundamentals are weak because of financial distress at states and municipalities.

Last week, I wrote a first piece on this topic, based on some work by Philip Greenspun and Fred Sheehan. I also just wrote a piece about Ambac Financial’s (ABK) likely bankruptcy, which will impact this market because of Ambac’s municipal bond guarantees. But, a Barron’s piece about Jim Chanos of Kynikos called “Short Seller: Dump Munis” piqued my interest and precipitated this particular article.

Why aren’t more municipal bonds being downgraded by the ratings agencies Fitch, Moody’s and S&P? If you look at sovereign debt in revenue-constrained countries like Greece, Portugal or Ireland, the ratings agencies are issuing warnings.

But, states and municipalities are suffering from the same revenue constraints. Tax revenues have plunged. Governments have shut down services to save cash. And they have cut staff. There are dozens of articles in the national press daily detailing the difficulties municipalities, cities and states are having.