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Municipal Market Newsletter Archive

Time Marches On

August 7th, 2020 by Kurt L. Smith

Unfortunately, there is no finish line for investing. If there was, we could now declare stocks a winner, bonds a winner, gold a winner, real estate…well, you get the idea. But there is tomorrow to deal with, not to mention next year and years from now.

Investing is a longer period endeavor. Bond investors know this as every bond you buy reminds you with a maturity date. What will happen over the next year, or two, five or ten or more years? Bond investors confront this reality with every purchase.

Wherever you want to draw the line, financial assets have been winners. Year-to-date, last year or two, last five…they, for the most part, have been good times for you as an investor of financial assets.

All of that is in the past; investing is about the future. If investing were a race, it would be an endless one as time marches on. Decisions made can be worthwhile as well as decisions not made. Second-guessing can be debilitating and is to be avoided. That is why it is important to make sound decisions.

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Protect Yourself

July 15th, 2020 by Kurt L. Smith

In my opinion, markets perform like markets. Narratives may try to explain them, but the narrative is a lie. The market did not go up because of ‘X’ or ‘Y’, the market just went up.

For the past several years I have been writing about the end of something, specifically the end of asset (stock, bonds, gold) prices rising trend. This was the case at the beginning of the year, as well, before we learned to spell corona.

Six plus months into this lousy year, just where are we? Let’s start with bonds because it is easier, or should be, to recognize a top or the top in bond prices when the price of a bond is just about the sum of all cash flows to be received throughout the life of the bond because the yield isn’t worth noting as a discount.

Look at this month’s bond sale from Tarrant County College District, Texas (below). Are those yields just not ridiculous? Would you entrust your money to a governmental entity for any length of time at those low (no) yields?

As discussed in my March 6th letter, earlier this year, whether you buy these yields or not is irrelevant. What is relevant is these are the yields that are used to price mutual funds and other portfolios of bonds. These low (no) yields, along with their treasury and corporate counterparts mean tens of trillions of dollars of fixed income portfolios are priced so fully as to negate future upside.

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Our World Has Changed

June 17th, 2020 by Kurt L. Smith

Most of us come to realize that change is inevitable and adapting to change is a part of life. Sometimes change is like aging in front of a mirror:  it isn’t until you look back several years that you realize, yes, I have changed…I mean aged.

This, of course, is not what I am talking about. Today we have a sea change (literally), as well as one massive change after another. The world has changed and adapting to it will be key to our survival.

My focus here is on the bond market, which just happens to be the primary tool of our monetary authorities: The Federal Reserve and the central banks of the world.  Fiscal authorities are also joining the bond rush as governments issue bonds to finance their response to our changed world.

The fundamental change that happened in the bond market occurred in early March and was the subject of my April letter. US Treasury securities traded at yields of 0.70% and lower across all maturities from a few days out to the longest thirty-year maturity per Bloomberg. This extremely low (or no) yield means longer term bond prices were at their highest prices ever as the price of the bond includes, effectively, almost all of the income you would receive in the days, years or even decades to come for the bond.

But it is not just treasury bonds. Other bonds such as mortgages, corporates and municipals also benefitted by the high bond prices as the yield spread on those bonds in early March were at or near historical lows. Historically low spreads, together with the low (no) yields of the treasury base means bond prices on almost all bonds were their highest prices ever.

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Not Lower For Longer

May 7th, 2020 by Kurt L. Smith

Last month’s letter highlighted the opportunity available in managed fixed income funds. March 6th was a pivotal moment with record low US Treasury bond yields and historically low spreads for other bonds, such as municipals, that I believe fixed income fund performance may be negative for years to come.

The high prices for bonds on March 6th, I believe, are the bond corollary for the record highs in stock prices in February. The dramatic swoon down in prices in early March affected both asset classes. Diversification between the two offered little safety.

Now, approximately six weeks from the March lows, prices have bounced back strongly. Taking a long-term approach, both stocks and bonds remain near their record highs. Looking backwards, the patient investor appears to be sitting in a good place atop decades of bull market bond and stock performance.

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March 6th

March 30th, 2020 by Kurt L. Smith

I pray this letter finds you and your loved ones healthy. My prayers are with the first responders and the healthcare professionals on the front-line saving lives and protecting ours.

This is the most important letter I have ever written. My hope is you will pass it along to your loved ones and friends because I believe the message is very important.

I have spent my entire career, over thirty years focused on the bond markets. Long-time readers know I have been writing that the latest move in financial assets (stocks, bonds, gold) is the end of something, namely the end of their long-term bull markets. As tens of billions of dollars is now being poured into cash in the form of money market accounts, it appears some may agree, and they may be scared as well.

I know you have a choice with your money, and I appreciate your trust in me and my abilities especially in these volatile times. I believe it is important for you to more fully understand bonds as well as sharing this letter with others who may find it helpful.

In the United States, bonds account for about $33 trillion dollars in assets: US Treasury securities make up about $17 trillion, corporate bonds $10 trillion, mortgages $10 trillion and municipals $3.9 trillion (all courtesy of SIFMA.org). The Federal Reserve has recently increased its balance sheet to $5 trillion, primarily in US Treasuries and mortgages (courtesy federalreserve.gov) leaving a lot of bonds in other’s hands with the bulk either professionally managed including in mutual funds.

Mutual funds, with their quoted net asset values (NAV) and performance data available on the internet may appear to be similar as both can easily be reallocated with a point and a click.  Both have the same disclaimer: “Past success does not guarantee future performance.”  But they are as dissimilar as a stock is from a bond.

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Prepared?

March 5th, 2020 by Kurt L. Smith

From record high to worst week since the financial crisis in October 2008, stocks ended thirty-plus years of bull in dramatic fashion. The top bull in the better than best of recent asset pricing is taking the leadership role in the great deflate.

From a high of 29,568 on February 12 to an end of month low of 24,681, the Dow Jones Industrial Average has lost over 4,000 points with 3,600 of it in one week (source: Bloomberg). This is not your normal pull back. This is not the buy the dip (one more time!). This is the end we have been talking about since November 2017 in my letter, Top of Tops. In that letter I noted 23,500 as the all-time high turning point for stocks. The extra run since then was a bonus.

You all know I have been writing about asset prices being at the end of something. From the depths of the financial crisis in March 2009 to February 2020, it was quite a ride. A ride I believed would be over (in November 2017) but continued through Groundhog Day (after Groundhog Day) 2020.

Consequential? Unbelievably so. This isn’t even the worst part. From my point of view stock investors “haven’t lost anything” as they are still ahead of November 2017. No, the worst part is ahead of us because it involves the bond market.

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Ground Hog Day

February 24th, 2020 by Kurt L. Smith

Though Ground Hog Day was officially February 2nd, I am referencing the 1993 movie starring Bill Murray. I feel like I am reliving the same day over and over again in the market place.

The Dow Jones Industrials traded today at the same level it did six weeks ago. Yet every morning I am seemingly greeted with a new intraday high for stocks. Bonds are scarce, yet every day I hope to scratch and claw my way to several worthwhile pieces.

Last month I wrote that asset prices were Better Than Best. After weeks of Ground Hog Days, guess what?  Prices are still Better Than Best. That is the danger in delaying writing this letter in hopes of writing something new. There is nothing new.

Even when we think there is something new (in Washington or in Wuhan), it is seemingly of little consequence. I don’t write about those types of things anyway, preferring to watch what the markets are telling me. Obviously, they have been telling me the transition from upward trend in prices to downward trend is taking its time. Does that mean six more weeks of this like the groundhog prognosticates? We will know when the markets tell us.

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Better Than Best

January 24th, 2020 by Kurt L. Smith

Asset prices were high months ago and as stock prices continue to set records what appeared to be best is now better than best. What a great period to have been an investor!

Bond prices have been higher (and interest rates lower) but not appreciably. While prices have trended lower since their Labor Day high prices and low yields (per Bloomberg), movement so far is at the speed of a glacier.

Gold prices are also near their highest since their 2011 peak of $1921, trading at $1611 earlier this month. And then there are stocks, which appear to be in their own stratosphere. In my November letter I noted how both bonds and gold spurted about twenty percent to their peaks. I didn’t give stocks a chance for a similar nod; I was wrong.

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High Demand for (Low) Yield

December 16th, 2019 by Kurt L. Smith

Long-time readers are well aware of my call to the end of the thirty-plus year bond bull market in 2012. That’s seven years now behind us. For long-term bonds this period has been quite a topping process (in 2012, 2016 and again in 2019) with the primary result being the tremendous issuance of new debt.

Treasury debt has exploded from $4.3 trillion in 2006 to $15.9 trillion in 2019 (Q2). My debt figures come from a wonderful website, www.sifma.org, check it out.  Luckily the Federal Reserve has been there as the primary buyer, expanding their balance sheet in various quantitative easing programs.

Right behind treasuries in debt expansion is corporate debt, rising from $4.9 in 2006 to $9.5 trillion (Q2). Federal Reserve Chairman Jerome Powell said in October that “leverage among corporations and other forms of business, private businesses, is historically high” –Bloomberg.

Indeed, not only are bond prices high (yields low) but there are more of them! As long as “lower-for-longer” holds, values should hold. Interest rates are low, so low it would appear that negative interest rates are a closer reality than higher interest rates.

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Bonds Rolled Over (Again)

November 18th, 2019 by Kurt L. Smith

From the front pages this summer, the story on bonds is they are no longer a story. Prices have rolled over as yields have risen and investors who bought on the price dips lately may be rethinking their commitment.

I have spent most of the last few years, as well as the last few months telling you this was the end of the run, not the beginning of a new one. The performance of the bond market over these years fits my description.

After several years of higher yields and lower bond prices, the bond market began a price correction late last year. But it was the performance of long-term treasury bonds in July and August of this year that received the out-sized attention. One of the longest treasury bonds, the 2.875% of 2049, rallied from about 100 in May, to 105 in July and 122 in August (source: Bloomberg, with prices rounded for conversation sake). Quite a move for a bond yielding less than 3%.

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NEWS FEED

The $247 trillion global debt bomb washingtonpost.com/opinions/the-2…