February 8, 2010

Do You Know Where Your Munis Are?

That times are tough is not news anymore.  The pinch is being felt all over these days, especially by our state and local governments who, unlike the Feds, can't just print money.

Many US states are running major deficits this year. California is one of the more glaring examples, handing out IOUs instead of paying bills.  Considering that the economy of California is larger than most countries in the world, defaults there will have a larger impact on us than will the problems in Greece, Spain or Dubai which have been in the news lately.

According to the Center on Budget and Policy Priorities, the US now has 48 states facing deficits averaging 6.6% of the 2010 General Fund Budgets.

(Since I know you are wondering, the two states still in the black are Montana and North Dakota.)pullout_3-9-10

Now we see Harrisburg, Pennsylvania passing a 2010 budget which does not include debt payments. In essence, Harrisburg is planning to default on their municipal bonds!

Municipal bonds are to a government what a mortgage is to you and me.  When you and I want to add onto our house we go get a mortgage.  When a local government wants to build something they sell bonds.  Both must be repaid or . . .

Jefferson County, Alabama (Birmingham) is teetering on the edge of bankruptcy. With $3 billion in municipal bonds outstanding there, this is a big deal.

I am writing about this because I believe we're just getting started and what we see today is just the tip of a very large iceberg.  I've thought several times that bonds, not stocks, would be the big story of 2010. And municipal bonds which are almost a $3 trillion market appear to be the most vulnerable.

With tax revenues falling and other major debt issues to consider, we are going to be seeing a lot more defaults and bankruptcies coming from local, city, and state governments.

But won't Uncle Sam just do another bailout?

The federal government has already spent $140 billion helping with state deficits over the past 2.5 years, but with states facing $350 billion in deficits over that same time period, the government could double its handouts and states would still be underwater.

Given the increasing outcry against additional bailouts and economic stimulus (look at the results of the Massachusetts election), the likelihood of another massive stimulus plan to help states is small.  Good luck expecting much more help from Washington.

The fact of the matter is that we appear to be on the verge of a muni bond crisis.  Local governments have already cut discretionary spending to the bone, raided rainy day funds, put new projects on hold and are raising taxes and adding fees as fast as they can.

Left to be scrutinized are the sacred cows of education, public safety, entitlement programs and interest on municipal bonds.

Muni bonds were often thought to be a safe haven, but given the economic outlook in the US, that may not be true at the moment.  When forced to choose between giving scarce resources to a faceless group of bond investors and keeping schools open or buying tires to keep police cars rolling, I'm betting that emotions will win out over facts, figures and legalities and the schools and public safety will win.

If you hold any muni bonds in your portfolio, I strongly urge you to examine the finances of the governments backing them and reassess the risk you are taking, because the risk in municipals has probably changed a lot since you first bought them.

My career began as a municipal bond broker, so I am comfortable working with munis. I watch the municipal markets clients who want to own munis through HCM's actively Municipal Bond Strategy.  I believe that active management - the ability to get your money out of harm's way during market declines - offers the best opportunity to stay invested for tax free income right now.

Call the office if you, or someone you know, has a muni bond portfolio that needs looking at.  The number is 778-4000.



Q: In a marble hall white as milk

Lined with skin as soft as silk

Within a fountain crystal-clear

A golden apple doth appear.

No doors there are to this stronghold,

Yet thieves break in to steal its gold.

What am I?

A: An egg.



Cathy and I have a friend who volunteers at the Prescott Area Women's Shelter, a place for women who suddenly find themselves homeless.  When I heard what they do to help women get job training and get back on their feet, I was impressed with the compassion and effectiveness of their operation.  With budgets getting tighter for all non-profits, PAWS has been feeling the pinch, too.

When I asked what kind of donations they could use, I was told that there is a constant need for:  Stamps, paper, envelopes, thank you cards, quarters for laundry, TP, paper towels, coffee, tea, fresh fruit & veggies, and Wal-Mart gift cards to buy dinner for the women when there is no meal provider at the shelter.  

If you feel like helping this worthy cause, you can send or drop donations off at 336. N. Rush St, Prescott, AZ  86301.  If dropping things off, call first to be sure someone will be there to meet you since the shelter closes during the day. Call 778-5933.  

If you would like a little inspiration when you are there, ask about the story behind Penny's Purses.


Quantum Investing

At this writing on March 7, 2010, gold is right about where it was at the beginning of the year when priced in dollars, but it has been advancing when counted in all other currencies.  This is a sign of market strength for gold that is masked by the rising dollar.  

The dollar strengthened in January and February and gold normally moves opposite to the dollar.  The fact that gold did not go down a lot in the face of a rising dollar is another sign of strength in the gold market.

So, the gold market appears healthy, despite being quite a bit below its highs.

The stock market also seems to be breaking out of its funk of the past few months and showing some positive signs.  

The Fibonacci level of 1115 on the S&P 500** that I wrote about in my December 15th newsletter again proved difficult for the stock market to move through until this past week.  

With its latest surge, both the number of stocks rising, small company leadership and the volume of shares changing hands are very positive; suggesting that this latest rise could go on for a while.  This shifts the odds of success in our favor, which is about as much as one can hope for in this business.

Quantum physics tells us that some subatomic particles will change their character just by being observed.  Sometimes I feel like I practice quantum investing because when I report the market is improving, often it is ready to take a breather and heads south for a few days.  

Right now we have reached the point where the market is ready for a breather before moving ahead again.   I would not be surprised if between now (Monday morning) and when you get this on Tuesday that the market takes a dip.

Remember the market never goes in a straight line for very long.  If we do have a pullback this week I believe it will be just adding texture in the zigs and zags of a market that is generally moving higher.  For a while, at least.


What We Were Saying Back Then.Typewriter

From our October 2, 2007 newsletter:

"I've discussed the possibility of a recession in our immediate future several times recently.  Here is another nail in the coffin . . . major spikes in oil prices have normally ended in recession.

"The current price of oil is still below the prices of the early 1980's after adjusting for inflation, but has certainly spiked up.  Is it a big enough spike to push us into recession?  I don't really know, but this bears watching."

(Note:  The National Bureau of Economic Research declared that the economy officially entered a recession in December, 2007)


What's Going On In Your Portfolio?portfolio


Flexible Income* portfolios are 47% in cash at the moment as the debt markets have shifted gears over the past month with junk bonds beginning to recover, government bonds beginning to falter, and the dollar rally possibly coming to an end.   Of the portion that is invested we own GNMA funds (government backed mortgages), some high yield funds and an Australian currency account.

These currency accounts are like money market accounts denominated in Aussie dollars.  We collect interest, (about 2% on this one) but the real benefit is that a potential rise in the Aussie dollar may give us a little growth, too.

We have moved our Careful Growth model* from zero to about 46% invested in the stock market over the past two weeks, but still hold a small portion of bonds and about 24% cash with which we can buy more stocks on any pullback in prices..

As you may have surmised by my earlier comments on gold, our growth portfolios now hold about 20% in gold spread between the yellow metal and gold mining stocks.

The recent bounce in the market has turned on the green lights (buy signals) for many leading stocks, to the point that it requires some effort to narrow down the list.  It seems like a buyer's market for stocks at the moment.  

About half of our stock market holdings are in stocks of individual companies.  I am focusing on just eight companies at the moment, buying about half as much as I really want to own in

each.  If they confirm my confidence in them by rising in price I'll buy more.  If not, they are "outta there" (technical term).  This simple approach is the foundation of the risk control measures I apply in managing your accounts.


Our Spotlight Strategyspotlight

Since I devoted so much space talking about other things, we will not be spotlighting a strategy in this issue of the newsletter.





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*    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.


**  The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market.  Investors cannot invest directly in the S&P 500 Index.

Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information


This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable; however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.