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Culling the wheat from the chafe is a great deal of the daily work, but it is only the beginning.

Our Plan Continues To Come Together

June 14th, 2016 by Kurt L. Smith
  • There has been no letup in the municipal bond market this year. Yields are low, prices high and firm. Yet we continue to find worthwhile bonds which I believe is a testament to our approach.

    Thankfully, the municipal bond market provides a tremendous amount of variety. We have fifty states plus Puerto Rico, Virgin Islands and Guam. We have general obligations, revenue bonds of an almost endless variety, along with debt secured  by countless types of assets. All this variety and that’s before we throw on the essentials for fixed income: a coupon rate and maturity.

    This variety, the anti-generic, is a crucial component of our approach. It is unique in the investment world and this is tremendously important as the world of investing has largely become one big, high-priced, low yielding world in which returns are piddling, that is when values aren’t plunging.

    Asset classes, across the spectrum, are struggling, some plunge and pop, but overall it is downright tough to have a plan to diversify a portfolio and feel comfortable that you are making progress with your investments. Traditional thinking has failed to work, or just plain failed, while unconventional thinking seems to be …conventional. Where are the ideas that work?

    The portfolio of yours that I care about is the one you have entrusted to me. I am glad I don’t have to worry about your stocks, mortgages, commodities and such. I am glad I can focus on your portfolio of municipal bonds. Best of all I am glad that the work we have done together all these years works well.

    This is not by accident. As the municipal bond market moved towards more and more generic bonds in the 1990s and early 2000s, we moved in the opposite direction. The idea that there will always be liquidity for you to sell your long-term bond is another assumption I gave up on many years ago. Markets change faster than the credit quality of bonds and I don’t like surprises any more that you do.

    We have a plan and the opportunity to execute the plan further each and every day. I have no idea what opportunities may arise tomorrow, but thankfully each day provides us with fresh variety upon which to work. And work we do, at a pace needed to separate the wheat from the chafe and make the prudent decisions needed to initiate the next opportunity.

    There was a time when investing involved a lot less work and also provided much more reward. I don’t have to tell you those days are long gone. Years ago we might only talk several times a year, buy a few large, long-term municipal bonds and move right along.

    For over ten-plus years I have taken the position that I don’t trust municipalities any further than I can throw them. With my background in accounting I know it’s not just the items reported on the financial statements, it’s the things that are left off. As I’ve said repeatedly over the last several years, I’ll let others try to discern the value of failing credits like Jefferson County , Detroit, Puerto Rico, Chicago, Chicago schools, Illinois and New Jersey just to name a few. The financial statements of these credits told me all I needed to know: too much leverage and no need for me to take into account what may be left off the financial statement. What day a municipality files for bankruptcy is not my concern; we have other and better opportunities elsewhere, I believe.

    Yes it is frustrating to see rotten, near bankrupt credits, trading as if they will be money good. This may be a consequence of years of quantitative easing or even easy money, but bottom-line, it is nothing new in my decades of experience in the municipal bond business. We are not investing in bonds because we think they will continue to trade as if they are money good; we look for bonds we believe to be money good. That’s why we stay(ed) away from Jefferson County, Detroit, Puerto Rico, Chicago, Chicago schools, Illinois and New Jersey as well as the countless other municipal bond credits I pass on each and every day.

    There is no shortage of junk credits in the municipal market and I believe junk municipal bonds to be a (fast) growing market in the years to come. Our approach allows for this and the utter variety and diversity of the municipal bond market allows us to remain focused on the daily prize(s). Culling the wheat from the chafe is a great deal of the daily work, but it is only the beginning.

    Thank you for the opportunity to work on your portfolio and work for you each day. We could not go out and be successful each day without each other and I appreciate the opportunity to return to you with bonds I truly believe to be worthwhile.

    Bryan Independent School District, Texas

    S&P AAA (AA- Under), Fitch AAA (AA Under)

    Permanent School Fund Guaranteed

    Due 2/15 Dated 5/15/16 Maturity: 2/15/2041

    Sale Amount: $42,125,000

    0 2016 2.00% 0.50%
    1 2017 3.00% 0.65%
    2 2018 2.00% 0.83%
    3 2019 5.00% 0.95%
    4 2020 4.00% 1.08%
    5 2021 4.00% 1.20%
    6 2022 4.00% 1.34%
    7 2023 4.00% 1.47%
    8 2024 4.00% 1.59%
    9 2025 4.00% 1.69%
    10 2026 4.00% 1.83%
    11 2027** 2.00% 2.00%
    12 2028** 3.00% 2.36%
    13 2029** 3.00% 2.46%
    14 2030** 3.00% 2.61%
    15 2031** 3.25% 2.66%
    16 2032** 3.25% 2.76%
    17 2033** 3.25% 2.81%
    18 2034** 3.25% 2.86%
    19 2035** 3.50% 2.86%
    20 2036** 3.50% 2.91%
    21 2037** 3.50% 2.95%
    23 2039** 3.00% 3.062%
    25 2041** 3.00% 3.087%

      *Yield to Worst (Call or Maturity) **Par Call: 2/15/2026

    Source: Bloomberg

    This is an example of a new issue priced the week of 6/7/16

    Prices, yields and availability subject to change


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