Archive for May, 2011

Weekly Recap & Outlook – 05.27.11

Friday, May 27th, 2011

Tower Private Advisors

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  •  Risk on, again?
  • Ugly economics, bouyed consumer, go figure

Today’s theme song comes from the Steve Miller Band…

Time keeps on slippin’, slippin’, slippin’

Into the future

Time keeps on slippin’, slippin’, slippin’

Into the future

Time keeps on slippin’, slippin’, slippin’

Into the future

Time keeps on slippin’, slippin’, slippin’

Into the future 

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Weekly Recap & Outlook – 05.13.11

Friday, May 13th, 2011

Tower Private Advisors

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  • Get out the smelling salts for commodities
  • Fearless forecast for gasoline
  • Torn edge effect!

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Weekly Recap & Outlook – 05.06.11

Friday, May 6th, 2011

Tower Private Advisors

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  • Commodity smash-up–oh, why not . . . commodity crash
  • Contradictory employment stuff

Prior Posts

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Attention: Indiana muni bond buyers

Thursday, May 5th, 2011

This week the Indiana legislature passed a measure that will make out-of-state municipal bonds taxable at the state and local tax level to Indiana residents.  According to The Bond Buyer, the law will take effect in 2012, and it is expected to generate “about $66 million annually,” and will go toward offsetting the $78 million loss of revenues from cutting the state’s corporate tax rate.

Up until now, Indiana residents have enjoyed triple-tax exemption on interest received on all non-taxable municipal bonds, which is unlike the arrangement in most states.  In most states it is common to tax out of state municipal bond interest, and in many states it isn’t uncommon to see only certain in-state municipalities tax-exempt at the state and local tax level.  All tax-exempt municipal bonds remain exempt from federal tax,  regardless of where from, and some particular issuers–Puerto Rico comes to mind–enjoy triple-tax exemption in all states.

At the margin, this change will have the following effects.   First, the demand for Indiana bonds will increase as Indiana residents who want to generate income exempt from Indiana state tax will be forced to buy Indiana municipal bonds.  Admittedly, the effect might be quite small as our state income tax rate of 3.4% (plus local taxes) doesn’t mean as much as, say, New York’s 10% tax.  Second, and related to the first, yields should drop on Indiana bonds (i.e. prices will increase).  Historically, Indiana municipal bonds have always traded cheap; this is, their yields were amongst the highest available. That’s unlikely to change significantly, only slightly.

In spite of the lower after-tax yields of out-of-state bonds to Indiana residents, the tax effects are small enough that the crucial diversification benefits of non-Indiana muni bonds should still be considered. In client accounts we will look at give-up yields, or the yield based on what someone is willing to pay us for the non-Indiana bonds, versus the yield on Indiana bonds. If we can get a after-tax yield on the Indiana bond that is better than the after-tax give-up yield on the bond we’re looking to sell, then we swap; if not, we pay the tax and hold the bond.

May 6 update

** There appears to be a provision to grandfather all bonds held as of December 31, 2011. For now that is unconfirmed.  **

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Seemingly bleak cover story

Monday, May 2nd, 2011

I’m a big fan of using cover stories as contrary indicators. (You can see previous examples I’ve cited by clicking here.)  The idea is that by the time an issue makes it to the cover of a publication it’s already widely discounted in prices and markets.  Barry Ritholz provides some rules for using magazine covers at his blog’s post here. I’m not sure mine, below, qualifies, but this is my sandbox.  Here are his rules, verbatim:

  1. Mainstream–not business–publication
  2. Well understood concept that is reaching a climax
  3. Asset price gains

I’m not sure the last one is a requirement; first, asset price losses ought to suffice; second, if a cover captures the general zeitgeist among the populace, and that’s factored into asset prices, than a reversal or lifting of the subject–as the contrary nature of the cover story argues–ought to provide the contrary catalyst.

Anyway, here is this week’s cover from The Economist.

I happen to agree with the cover story’s angle, although I think I know the answer. Not that it’s relevant to this particular posting, but it has to do with the fact that the recent recession was accompanied by a financial crisis. In the past, that combination has lead to very subdued recoveries.Taken at its face value, the contrary angle would be that the economy’s weakness is priced into assets and any positive surprise would push risk assets quickly higher. 

Looked at only from the angle of Jane Consumer, I’d say this pretty well sums it up: this is just a lousy economy. Any surprise in the economic statistics–like a big increase in non-farm payrolls or, better yet, anecdotal stories about one’s neighbors (the closer to home the better)–could spur buying of stocks.

I think, however, that the tenor of professional investors has been much more upbeat, such that they might poo-poo this cover story by spinning things bullishly as they’re wont to do.

In conclusion I’ll put it this way.  Individual investors have not rushed to stocks. Thus, this cover story probably captures their mood pretty well, and if it’s the contrary indicator it appears to be, we might see individual investors return to stocks. But the professional investment class is far more important, and they’re already in, already bullish.

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