Cash Outperforms

By any measure, 2018 was a tough year for investing. The one asset class that outperformed all others was Cash. That statement, in a world of tens of trillions of dollars of investments at stake, should be chilling.

Besides Cash, with a return of 1.8% for 2018 per S&P US Treasury Bill (0-3 month Index), there were a few small areas of positive performance. Municipal bonds per S&P Municipal Bond Index finished up 1.3%. We discussed municipal bond performance, or lack thereof, as suffering from lower prices. Prices fell on longer term municipal bonds, but not enough to drag coupon income into negative territory.

The predominant problem for 2018 investing was one of trend. We drew our line in the sand with our November 2017 ‘Top of Tops’ letter. Since then the winds of change are no longer at our back for stocks (they changed years ago in bonds), prices are trending lower. Both stocks and bonds are in bear markets now.

At the Select Approach™️ we combined the attributes of cash with the advantages available in the municipal bond market to find worthwhile opportunities for you. We performed last year because cash is king and will remain so particularly as the bear markets for stocks and bonds begin to be identified as such. This is why proclaiming the bear markets in 2017 (stocks) and 2012 (bonds) is so important.

The most important message in last month’s letter was that markets move, not in a straight line. The statement is true in all markets; what is different for stocks is the direction of trend. Prices soared for stocks after my November 2017 ‘Tops of Top’ call only to finish 2018 in the negative. Last month’s bounce in stock prices does not change the trend; it merely confirms that markets indeed do move, not in a straight line.

The same idea is true for longer-term municipal bonds. Last year’s performance was one of the few positives in investing, but the trend for bond prices remains down. With yields of one-something percent to three-something percent (see the Spring TX ISD bond scale below), one cannot afford to give up much in the way of price and still remain positive (hence last year’s 1.3% return for a longer term bond index).

The idea of buying longer-term municipal bonds for the higher yield may look appealing, until one realizes that the trend for prices is lower. One should face a similar reality with respect to stocks. It may seem like a good idea, based on historical figures, until one realizes that the trend for prices is lower.

Our goal is to continue to find you worthwhile municipal bonds using The Select Approach™️. You are familiar with the results and our goal is to work our plan together.

Spring Independent School District, Texas

Moody’s Aaa (Aa2 Under) Fitch AAA (AA- Under)

Permanent School Fund Guaranteed

Due 8/15 Dated 2/15/19 Maturity: 8/15/2043 Sale Amount: $98,070,000

YEAR MATURITY COUPON YTM*

2       2021      5.00%      1.76%

3       2022      5.00%      1.78%

4       2023      5.00%      1.83%

5       2024      5.00%      1.91%

6       2025      5.00%      2.00%

7       2026      5.00%      2.11%

8       2027      5.00%      2.23%

9       2028      5.00%      2.32%

10      2029**  5.00%      2.44%

11      2030**  5.00%      2.60%

12      2031**  5.00%      2.68%

13      2032**   5.00%      2.74%

14      2033**   5.00%      2.80%

15      2034**   4.00%      3.14%

16      2035**   4.00%       3.22%

17     2036**   4.00%       3.29%

18     2037**   4.00%       3.35%

19     2038**   4.00%       3.42%

20     2039**   4.00%       3.48%

24     2043**   4.00%       3.68%

*Yield to Worst (Call or Maturity) **Par Call: 8/15/2028

Source: Bloomberg

This is an example of a new issue priced the week of 1/28/19

 Prices, yields and availability subject to change