Municipal Letter Newsletter Sign-up >>>


But all cycles…cycle. Trends continue until they no longer do. I can also say with strong conviction that trends change when few (perhaps the fewest) people notice.

Another Step Closer

September 5th, 2014 by Kurt L. Smith
  • Another month, another Letter. I appreciate your readership, particularly in these times of seeming sameness. No body likes to throw cold water on good times, my self included.

    I hope your summer has provided you and your family much in the way of re-creation. These are indeed good times with plenty of worthwhile destinations with fine accommodations and restaurants to boot. It has not always been thus.

    Cycles happen and will continue to happen despite the hubris of men (and women) to make it otherwise. Despite a stock market at all-time highs, rising from the sideways malaise of the 1970s, each of us is well aware that such seeming abundance also has its ravages.

    A witness to the Texas oil and real estate debacle of the 1980s, I also witnessed the second-wind renaissance of Texas, particularly surrounding the big cities of Dallas, Houston and Austin. Yet as anyone who drives this great (big) state knows, there is growing wealth right along with small towns that not only look dead, but they are probably bankrupt or near bankrupt in many ways.

    Yet Texas is extremely lucky. The oil and gas boom continues. In areas of west Texas that appeared to be dormant for many decades, the oil and gas boom is financially for real, providing new jobs, new cash, new activity — the growth our country needs.

    My trip to Oregon this year appeared to be the tale of two, strike that, the tale of one city, Portland. If you are looking for a job in Oregon, Portland must be the place as we sat in rush hour(s) traffic on the Interstate for what seemed like forever.

    The rest of the state however is waiting for its new day. The beneficiary of a once bountiful timber and logging industry, downstate Oregon has one economic look and it is sad. Logging is still done (I can attest from the logging trucks on the road), but the industry looks like the oil and gas industry in Midland twenty years ago: next to non-existent.

    Oregon seems to have a lot going for it: tremendous arable land and abundant water, both in short supply for its neighbor California. The pace of growth seems subdued (if it exists at all) though the ingredients seem to be there.

    My next stop will be in the northeast, an area that appears to mimic Texas with a concentration of growth and wealth in the big cities, here New York City and Boston. Like Oregon, the northeast has been devastated in areas once thriving in the logging and paper business.

    Yesterday I was (briefly) excited to see a couple of municipal bonds out for the bid that looked quite promising. The bonds were general obligations of a small fire district in upstate New York, between Schenectady and the Vermont border in the Adirondack Mountains. Fire district bonds usually do what they are supposed to do: receive tax payments collected by the county to pay debt service and maintain a fire station and equipment with minimal employees (and their pensions).

    There was something about the situation however that gave me pause. The area was, judging from Google satellite and Google car pictures, fairly dead. Indeed Wikipedia said the town’s peak was around 1900. That’s a long time since peaking and I certainly saw nothing indicating even small hope for this area.

    My experiences this summer have been consistent. To say there is growth (or the prospect of growth) in the US is to paint the picture with a very broad brush. Big cities and their surrounding areas appear vibrant and healthy while a wide area of the country seems devoid of capital , growth, employment and often hope. There is nothing new to this trend as it has been happening for over a century (evidently).

    With tens of thousands of different municipal bond credits, I see (and must determine) various trends that persuade or dissuade investing in a particular municipal bond. This variety is a strength for us and our municipal bond investments.

    We prefer growing areas over dying areas. We prefer less leveraged situations and shun over leveraged situations. We prefer to focus on cash flows (revenue streams) rather than focusing on balance sheets and what liabilities may be missing or understated. These tenets have served us well through the years.

    But all cycles…cycle. Trends continue until they no longer do. I can also say with strong conviction that trends change when few (perhaps the fewest) people notice. This was true with long-term interest rates in 1982 and it was equally true in 2012 when the trend changed again. Here we are two years later and few people recognize that the trend for long-term interest rates is now higher.

    Low or zero interest rates appear to be, well, low or zero interest rates. Prices top, they pull back, they rise again….then they plunge. In our bond experience over the past thirty years we have primarily the experience of 2008 with plunging bond prices. Yet, looking back on it, 2008 appears to be the bond equivalent of 1987 for stocks: swift, devastating, brief and then fully recovered. But remember the plunge in stocks in 1987 and bonds in 2008 both occurred while those markets were trending higher. Price plunges when prices are trending downward, as bonds are now, should be even more devastating than the 2008 experience.

    We are further down the road now. Asset prices are not universally higher: only stocks remain standing with a trend change forthcoming. I believe the changing trend of lower (much lower this time) bond prices will reassert itself in the coming months. Trends have changed and trends will change — important facts to remember when investing for the future.

    Northwest Independent School District, TX
    Moody’s Aaa (Aa2 Underlying) Fitch: AAA (AA Underlying)
    Permanent School Fund Guaranteed Due 2/15 Dated 9/1/14 Maturity: 2/15/2039
    Sale Amount: $66,300,000

    4 2018 2.00% 0.79%
    5 2019 3.00% 1.09%
    6 2020 3.00% 1.42%
    7 2021 3.00% 1.69%
    8 2022 4.00% 1.95%
    9 2023 4.00% 2.14%
    10 2024 4.00% 2.28%
    11 2025** 4.00% 2.51%
    12 2026** 5.00% 2.47%
    13 2027** 3.00% 3.00%
    14 2028** 3.00% 3.12%
    15 2029** 3.125% 3.20%
    16 2030** 3.125% 3.24%
    17 2031** 3.25% 3.30%
    18 2032** 5.00% 2.90%
    19 2033** 5.00% 2.97%
    20 2034** 5.00% 3.02%
    21 2035** 5.00% 3.07%
    22 2036** 5.00% 3.12%
    23 2037** 5.00% 3.14%
    24 2038** 5.00% 3.16%
    25 2039** 5.00% 3.18%

    *Yield to Worst (Call or Maturity) **Par Call: 2/15/2024
    Source: Bloomberg
    This is an example of a new issue priced the week of 8/25/14
    Prices, yields and availability subject to change


    The $247 trillion global debt bomb…