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We live in the age of Bubbles and one thing always follows a Bubble: the pop.

High Prices Be Damned

December 20th, 2013 by Kurt L. Smith
  • For some things in life, the price is the price.  You must pay it because you have to or you need to pay it.  With one son in college and another on his way next year, I know all about prices one must pay.  Some people look at investing the same way: the cost is the price one must pay.

    I could not disagree more.  One does not need to own Stocks, Bonds, Real Estate, Gold, Commodities, Hedge Funds, Junk Bonds, Mortgages, Emerging Market Stocks and Bonds or anything else Wall Street creates for your investment itch.  Just because another paid over $1000 for a share of Google last week doesn’t mean you should as well.  Thankfully in the investing world, prices do go down as well as up.

    I say thankfully because I am thinking about your children (and mine) as well as your grandchildren.  I am an optimist about our future; I am not an optimist that believes asset prices have to continue to rise in order for prosperity to continue.

    Asset prices are no longer universally rising.  I have discussed the popping of the Gold Bubble in September 2011 at $1921 an ounce ($1253 at the end of November).  I have also discussed the Bond Bubble bursting.  The low yields of the past equating to record high prices:  US Treasury ten year notes peaked in July 2012 with a 1.38% yield (2.74% recently or down 11% in price) and the long US Treasury bond peaked with a 2.44% yield at the same time (3.80% recently or down 25% in price).  Higher yields mean lower prices and after eighteen months the trend of lower prices is firmly in place and I believe will accelerate in the near future.

    The Municipal Bond Bubble (pop) just celebrated its one year birthday.  Long-term municipal bonds yielded just 2.5% at the top of the market and yields are now about 5%.  Buying long-term municipal bonds could yield you more today than a year ago but that’s no reason to buy them.  Like their Treasury note and bond brethren, I expect municipal bonds to continue to cheapen in price and rise in yield, so we will continue our Select ApproachTM of investing in shorter-term, cash alternative, municipals.

    My investment philosophy is biblical: there is a time to reap and a time to sow.  Reaping is the current environment and I believe one does not have to look far to find the reason.  We live in the age of Bubbles and one thing always follows a Bubble: the pop.

    Bubbles result from leverage.  The bigger the bubble the greater the leverage.  Everybody is doing it is one refrain; everybody has to do it (borrow) is another.  Sometimes you are a willing participant and other times you may be caught up in something you can’t imagine or fathom …until it is too late.  Debt is like that.

    As long as tomorrow is like yesterday, everything appears to be fine.  The 1990s was like that.  Things were good and getting better.  Borrowing money is what you did in the 1990s and soon we were all partying like it was 1999 (because soon it was).

    Quickly however things changed.  All of a sudden tomorrow wasn’t like yesterday and internet stocks imploded.  Suddenly you couldn’t take your dog to work anymore because your company shrunk or vanished.  Whether General Electric (2000 high of 60, recently 26) or Dell (2000 high of 60, taken private last month at 14), not all Stocks recover and sell at higher and higher prices (even after 14 tumultuous years).

    Excessive leverage continues today and the odds of a pop to follow this Stock Bubble grow seemingly closer each day.  Change is one great equalizer and thank goodness for our children and grandchildren.  The popping of Bubbles is fortuitous for those who work (again, your children and grandchildren).  Bubbles are also fortuitous for you as well…as long as you are a reaper and direct your sowing inclinations into Cash and other short-term alternatives.

    I continue to watch the most active of municipal bond issuers (also among the most leveraged of municipal bond issuers) sell their bonds at what I characterize as ridiculously low yields and high prices.  Investors who feel they must invest now are buying these bonds; I prefer to go a different route.

    The municipal bonds of infrequent issuers (usually among the least leveraged of municipal bond issuers) sometimes do not trade at the highest prices and lowest yields of the (leveraged) frequent issuer.  This is a bit ironic with leveraged frequent issuers seemingly offering the highest prices and best liquidity in the marketplace.  But I view this situation similar to the seemingly never-ending Bubble in Stocks.  Leverage, even excessive leverage, is something one can ignore…until the day the market wakes up and no longer ignores it.

    With the popping of the Municipal Bond Bubble one year ago, Puerto Rico bonds have become the poster child for excessive leverage: okay yesterday, but, whoosh, not okay today.  General Electric and Dell were poster children of past Stock Market bubbles.  With almost every company in the world today leveraged beyond belief (certainly leveraged more than any time in history), it appears we should have no shortage of poster child candidates for the coming Bubble pop.

    I believe it is a time to reap and that is why I continue to look for low leveraged, short-term municipal bond issues for us to invest.  Let others continue to pay the high prices of today; we will continue to do what we do which will keep you prepared for the coming Bubble pop as well as their continuing consequences.


    Amarillo   Independent School District, TX
    Moody’s Aaa (Aa2 Underlying)    S&P: AAA (A+ Underlying)
    Permanent School Fund Guaranteed DUE 2/1 DATED 12/1/13 MATURITY: 2/1/2034
    SALE AMOUNT: $30,155,000

    1 2015 2.00% 0.25%
    2 2016 2.00% 0.40%
    3 2017 2.00% 0.70%
    4 2018 2.00% 1.00%
    5 2019 3.00% 1.42%
    6 2020 2.00% 1.87%
    7 2021 5.00% 2.25%
    8 2022 5.00% 2.53%
    9 2023 5.00% 2.76%
    10 2024** 3.00% 3.07%
    11 2025** 3.125% 3.23%
    12 2026** 3.25% 3.377%
    13 2027** 5.00% 3.41%
    14 2028** 5.00% 3.53%
    15 2029** 4.00% 3.85%
    16 2030** 4.25% 3.97%
    17 2031** 4.25% 4.06%
    18 2032** 4.25% 4.13%
    19 2033** 4.25% 4.19%
    20 2034** 4.25% 4.25%

    *Yield     to Worst (Call or Maturity) **Par Call: 8/1/2023
    Source: Bloomberg
    This is an example of a new issue priced the week of 12/5/13
    Prices, yields and availability subject to change


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