ARTICLES

An Alternative To Money Market Funds

May 2016

April is behind us and what a month it was! Crude oil prices topped $40 per barrel amid signs the supply glut is easing. The OPEC meeting in Vienna June 2 is now in focus. Oil prices have likely bottomed since the February low but have taken a big toll. Saudi Arabia borrowed $10 billion from a group of banks in April to deal with a growing budget deficit resulting from the lower crude oil prices.
Fed Chair Janet Yellen made clear the Fed will not aggressively raise rates this year after its April meeting concluded in Washington. The ECB also stood pat at its meeting last month. The Fed will next meet June 14-15 as doubts rise about the economy requiring a rate increase. In fact, the global economy continues to struggle as the IMF cut its growth forecast to 3.2% for 2016, the 4th time the IMF has done so in a year.
There were some notable developments in the credit markets. Bank lending remains subdued in the US due to the flat yield curve and the onerous Dodd Frank regulations. It is doubtful that this situation is changing near term. However, Argentina, which once had the largest sovereign debt default in history, raised $16.5 billion in a heavily oversubscribed debt offering!
Meanwhile, the situation in Greece and Puerto Rico has grown worse. Greece is negotiating another bailout in Europe as a 3.5 billion euro debt payment is due in July. Greece now seeks a writedown rather than renegotiate the existing terms on its debt, according to Reuters. Similarly, the Puerto Rican government is requesting that Congress pass legislation that would enable Puerto Rico to restructure its $70 billion debt load.
Make no mistake, Puerto Rico is also seeking a debt relief haircut. At present, US bankruptcy law prevents the 50 US states and US territories such as Puerto Rico from filing for bankruptcy. If Congress granted Puerto Rico’s request, undoubtedly several US states such as New York, Illinois, California and New Jersey would seek the same access. Doing so would create large losses for both the bondholders and the municipal bond insurers, while creating havoc in the municipal bond market. Remember, Ambac filed for bankruptcy during the financial crisis as it was unable to meet the guarantees it made on collateralized debt offerings it insured.

Investors with large holdings of municipal bonds should consider reallocating a portion of their funds into S&P 500 companies with a history of increasing their dividends. These companies offer generous dividend yields and the potential for large capital gains over the next year. If an investor holds the common shares for at least 61 days, all of the dividends will be taxed at the favorable 15-20% tax rate, depending on the investor’s tax bracket.

My weekly radio show on WWPR 1490 AM airs at 2pm each Friday.

The show can also be heard live on the station’s website (1490wwpr.com). Archived broadcasts of each show are also available on my firm’s website here. Enjoy!

If you are unhappy with the returns offered by money market funds, feel free to contact us.

 

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