Posts filed under “Fixed Income/Interest Rates”
Detroit, Munis, A Follow Up
David R. Kotok
Cumberland Advisors July 26, 2013
As a follow-up to the Detroit-Muni Bond series we have published, here are additional views:
1. John Ruiz of Morgan Stanley Matrix offers this: “Note to cross-over buyers: if you see Meredith Whitney on your TV screen, and she is talking about municipal bonds, you should probably call your sales coverage to discuss buying opportunities. This is not to posit a cause-and-effect relationship.” (“Return of the Muni Mean Reversion Trade,” July 26, 2013)
2. Tom Tzitzouris of Strategas Research Partners, LLC, published a terrific piece of research on Wednesday, July 24, 2013. Tzitzouris looked at the general obligation debt structure of cities and cross-referenced it with crime rates. He analyzed personal crime rates and property crime rates. He was then able to draw inferences from the statistics, and he was able to compare Detroit with other cities.
Countering predictions that there will be a “staggering” number of cities defaulting, Strategas research shows that Detroit is an outlier when you combine crime rates with debt burdens in order to rank cities. Other higher-risk cities include Memphis, Philadelphia, and Baltimore. Strategas notes that the market is not differentiating credit-risk pricing using this metric.
3. There has been a lot of commentary about Muni ETFs and closed-end funds. Since we do our own research and manage accounts of individually selected bonds, our position is straightforward on this: we rarely use Muni bond ETFs, and we do not use mutual funds for managed Munis. That said, an excellent discussion about Muni ETFs has been written by Ollie Ludwig on IndexUniverse. Ollie interviewed me and then added his own commentary on the ETF piece. Please note that he titled his piece; I didn’t. He called it “Kotok to Whitney: What Planet Are You On?” http://www.indexuniverse.com/hot-topics/19382-kotok-to-whitney-what-planet-are-you-on.html .
It sure has been an interesting week. Detroit triggered a great debate. As of this minute, the highest-grade tax-free bond is still trading above the taxable treasury of a corresponding maturity. We are seeing crossover buyers in the market.
Next week we gather in Maine for the annual discussions at Leen’s Lodge. I’m sure Detroit will be a subject to converse about. The festivities commence on Wednesday night at dinner and continue through the weekend.
More to follow.
David R. Kotok, Cumberland Advisors
Click to enlarge Kotok via David Wilson: Municipal bonds are an “outrageous bargain” in the wake of Detroit’s bankruptcy filing, according to David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer. As the CHART OF THE DAY shows, the highest-rated notes and bonds of state and local governments yield more than Treasuries…Read More
More on Munis, Detroit, Bloomberg, Whitney & Wilson David R. Kotok Cumberland Advisors, July 24, 2013 In our recent commentary on municipal bonds and Detroit, we argued in favor of buying the highest-grade AAA tax-free municipal bond It currently yields more than the corresponding taxable US Treasury obligation. Meredith Whitney, Muni Cassandra emeritus…Read More
Cheap Munis, Not Detroit David R. Kotok Cumber July 22, 2013 We thank Michael Wilson of Morgan Stanley Wealth Management and FactSet Research Systems for a compilation of returns. Michael’s commentary in July talked about how “There was no place to hide in fixed income.” We agree, although we think hedging dampened volatility…Read More
Rising interest rates could mean the window to fix infrastructure on the cheap is closing Barry Ritholtz, Washington Post, July 12 Thanks to the Federal Reserve’s zero interest rates and quantitative easing policies, borrowing costs are near generational lows. The costs of funding the repair and renovation of America’s decaying infrastructure are as…Read More
> My Sunday Washington Post Business Section column is out. This morning, we revisit our October 2011 discussion about infrastructure repair. The present conversation is about the once in a lifetime opportunity to finance these works at historically low interest rates, which are now starting to rise. Here’s an excerpt from the column: “Thanks…Read More
Monetary Policy Tightening and Long-Term Interest Rates Pedro Amaral FRBC 07.09.13 The Federal Open Market Committee (FOMC) has maintained an accommodative monetary policy ever since the 2007 recession, and some financial market participants are concerned that long-term interest rates may increase more than should be expected when the Committee starts to tighten. But…Read More
Last week, Jeffrey Gundlach of DoubleLine funds did a webcast, discussing his most recent slide deck. This followed a month of volatility and rising rates. My friend Laura sent me a full rundown of notes from someone a friend of hers who sat in on the webcast (Laura, please forward that name!).
This is a follow up to his last webcast a month ago (notes from that webcast follow these notes. The full presentation is attached.
Gundlach believes the liquidation and massive volatility is most likely over, and that creates some opportunity in specific sectors: EM stocks, closed end muni funds, long end UST and HY corporate bonds. Some of those sectors now have a good value proposition due to the rate rise and spread widening. He still likes the NKY up to 14,000 and is still short the yen.
1. Interest rose more than he expected.
2. Recent interest rate rise has nothing to do with inflation…CPI and PCE both well below Fed’s target. The PCE (Fed’s preferred target) is at half century low.
3. Gold is weak, partially as a loss of inflation hedge. Consensus is gold is going to $1000. Pivot point has been taken out. Chart is ugly.
4. CRB index is eerily stable at low level…feels it could fall below “shelf” and fall to 400. Partly because China is not growing as people think it is.
5. Incomes are stagnant, China is slowing, no global growth…this selloff has nothing to do with inflation
6. Dollar is strengthening…also deflationary for US
7. Global equity markets have been dropping led by Japan and Shanghai
8. NKY finding support at 12,500…thinks it will go back to 14,000
9. Enormous underperformance of EM equities…causing stress among investors
10. Liquidation has seemed to have ended. Expecting things like EM equities to correct…this is a good place for a contrarian play for next few weeks.
11. Brazil is a concern due to social unrest…but a basket of EM equities looks attractive.
12. Shanghai is ugly…brand new low…this along with commodity prices are saying there is no growth in China and the world.
13. Bank of China is shadow tightening…Shibor rates saying Chinese banks not comfortable lending to each other…a concern for Chinese banking system
14. Expecting stability in July to come back
15. Labor market still stressed…employment to population ratio is not recovering along with other job metrics…difficult to make case there is either economic growth or inflation in the pipeline.
16. Fed talking out of both sides of mouth…how does he reduce his GDP and inflation expectations…and talk about reducing QE? Said Fed is basically funding the budget deficit. So tapering is OK if deficit goes down, but Fed not communicating that properly.
17. Higher rates hurt leveraged markets…EM, HY, MBS, muni, etc…margin calls breed selling breeds more deleveraging breeds concern about credit which breeds more selling…this is what really happened past month. Some markets really gave investors big losses which caused concern (EM, MBS, etc), and not the generic rise in rates.
18. Housing market is facing major headwinds now due to major increase in mortgage rates, on top of higher prices. Change in affordability has been huge past month. This will hold back economy for near term.
19. The past 6 weeks, UST was best performer out of Lehman Agg index…in a relative sense, of course. Corporate bonds and MBS fell much more as spreads blew out due to deleveraging. So you can’t say UST are the problem…UST is the tail, not the dog.
20. Yield curve seems too steep now relative to Fed policy. He thinks the worse is over for UST.
21. HY was a big trouble point with leverage money getting stopped out. HY index dropped 7% over past 6 periods. The liquidation cycle seems to have run its course and market has come back. The worse seems to be over for HY for now.
22. HG also dramatically underperformed UST during past 6 weeks.
23. TIPS not protecting you from inflation based on market moves relative to time frame of inflation. Doesn’t like them. Not as against them now at these levels though. But he does not see inflation coming any time soon. The markets in June are telling you “deflation”.
24. Mortgage REITs…NLY as proxy…seeing some but not a lot of rebound.
25. Investors were lulled to sleep by Ben for two years…now he changes his tune to remove leverage…and investors found themselves over-invested. So people have sold to de-risk and get back to more comfortable risk levels.
26. He likes closed end muni funds here…negative price actions has caused massive discounts in the 6-8% range…oversold.
27. HY is now a good value proposition and value buying will stop the route
28. Thinks QE will continue until we see negative consequences. One was too much leverage in the system. If we are done with the liquidation cycle, then Ben did a decent job.
29. If you sell any bond funds here for fear of higher rates, you should keep cash…for if bonds go down again, everything will go down.
30. Thinks will see yields lower at end of year than what we see now…and by a substantial amount to capture decent profits
31. Gold has less than 20% downside from here, and up to 50% upside…but will probably go down first…but wouldn’t bother selling now if you have ridden it all the way down…starting to buy gold now if you have none makes sense.
32. He thinks people have foolishly redeemed bond funds. Thinks there is good value there now.
Click to enlarge Yesterday, in response to our post on how wrong the public was back in this 2011 Gallup poll, the following suggestion was made: Which asset performed best is dependent on your definition of “long term”. 2011-2013 is at best medium term. Long term to most people means decades, 20 years or…Read More