Detroit, Munis, A Follow Up

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.

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David R. Kotok, Cumberland Advisors