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Obviously if US Stocks merely join the ranks of the downward fray of US Treasuries, Corporate Bonds and Municipal Bonds, it will be bad. If US Stocks later join the ranks of the Emerging Markets, Gold or Silver, it will be worse.

Joining The Fray

June 28th, 2013 by Kurt L. Smith
  • Bond market performance has gone from bad to worse.  The month of May was bad; June even worse.  Prices of longer-term bond funds have plunged, primarily in the past eight weeks, leaving municipal bond dealers and longer-term municipal bond portfolios down about ten percent for the period.

    By contrast, our Portfolios, the portfolios of The Select ApproachTM, are weathering the storm just fine.  Our selection of municipal bonds, emphasizing shorter terms and callability, are performing the way we intended.  With fresh Cash arriving regularly from calls and maturities, today’s higher yields and weaker prices should allow greater opportunities in the weeks and months to come.

    For the past several months this letter has stressed the potential for weaker asset markets across the board.  Silver has led the rout, peaking in April 2011.  This was followed by Gold, peaking in September 2011, US Treasury notes and bonds peaking in June 2012, Corporate Bonds in October 2012 and lastly by Municipal Bonds in November 2012.

    With Gold and Silver weakening first and having the longest correction as well, we witnessed a plunge in their prices in April 2013.  This situation of going from bad to worse was then mirrored not only by US Treasury notes and bonds but now by Corporate Bonds and Municipal Bonds.

    Stocks appear to be in the early stages of bad, seemingly providing plenty of warning signs here for you to avoid the possible worst.  Leading the way down in stocks are the emerging markets while US Stocks, so far, are slow to be pulled down.  The MSCI Emerging Market Index (EEM – NYSE) peaked at 50.43 in May 2011, was recently at 44.27 in May 2013 and recently hit a low of 36.16 last week.  At down 28% this must be the bad phase; Silver is down 63% over the same period (49.80 in April 2011 to 18.45 last week), indicating what worse might be.

    We have waited many, many months for asset prices to turn back down and now it appears the final asset class, US Stocks, are now joining in.  It has been a number of weeks now since US Stocks peaked.  Obviously if US Stocks merely join the ranks of the downward fray of US Treasuries, Corporate Bonds and Municipal Bonds, it will be bad.  If US Stocks later join the ranks of the Emerging Markets, Gold or Silver, it will be worse.

    If my recent Letters have not made it clear to you before, you should not be in any asset class except Cash.  The downside risk of slowly, but persistently, and later plunging prices can wipe away years of yield or return.  Our Municipal Bond investments utilizing The Select ApproachTM provide a substitute for Cash.  The individual municipal bond investments must be found in the marketplace and cannot simply be created.  But as I said earlier, conditions in the municipal marketplace are currently highly conducive to finding more municipal bonds for our portfolios.

    This is the third swoon in the Municipal Bond market since 2007.  Our current plunge is the worst since 2008, a period when the Municipal Bond market virtually shut down during the entire fourth quarter.  In 2008 the hope was that liquidity would return and prices would firm quickly.  Liquidity and pricing did not return quickly and bad did become worse.  Will the history of 2008 repeat itself in 2013?  I designed The Select ApproachTM so we wouldn’t have to find out.  Your short calls and short maturities provide you with liquidity, price stability and income.

    In an era of asset bubbles, particularly asset bubbles where tremendous amounts of leverage are at work, Cash provides the safety of wealth protection.  Investments in any other asset class must be kept on a short leash and quick action must be taken.  Otherwise, bad can quickly become worse.  This is the lesson of Silver, the lesson of Gold, the lesson of the Emerging Markets, the unfolding lesson in US Treasuries, Corporate Bond and Municipal Bonds.  My fear is that if and when US Stocks join the trend, and I believe they have, we will see bad become worse.

    It is not too late to move to the safety of Cash.  In every other asset class we have seen bad become worse and we have yet to see bad become less bad.  I have no idea why this is this case.  I haven’t even tried to tell you why anything discussed above is the case; the more important fact is that it just is the case.  We will write the grand narrative of the great asset bubble years from now.  Today it is important that you are not a part of it.

    Sabine Independent School District, TX
    S&P: AAA (PSF Enhanced) A+ Underlying
    Permanent School Fund Guaranteed
    DUE 2/15 DATED 7/15/13 MATURITY: 2/15/2043
    SALE AMOUNT: $19,650,000

    YEAR MATURITY COUPON YTM*
    1 2014 4.00% 0.34%
    2 2015 4.00% 0.65%
    3 2016 4.00% 1.03%
    4 2017 4.00% 1.33%
    5 2018 4.00% 1.67%
    6 2019 4.00% 1.94%
    7 2020 4.00% 2.20%
    8 2021 4.00% 2.45%
    9 2022 4.00% 2.76%
    10 2023 4.00% 2.96%
    11 2024** 4.00% 3.15%
    12 2025** 4.00% 3.33%
    13 2026** 4.00% 3.52%
    14 2027** 4.00% 3.75%
    15 2028** 4.00% 3.88%
    16 2029** 4.00% 3.99%
    17 2030** 4.00% 4.08%
    18 2031** 4.00% 4.14%
    19 2032** 4.125% 4.20%
    20 2033** 4.25% 4.25%
    25 2038** 4.25% 4.43%
    30 2043** 5.00% 4.22%

    *Yield to Worst (Call or Maturity) **Par Call: 2/15/2023
    Source: Bloomberg
    This is an example of a new issue priced the week of 6/27/13
    Prices, yields and availability subject to change

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