Upcoming slate should see ‘plenty of demand’

Cumberland Advisors John Mousseau

Excerpt from…

Upcoming slate should see ‘plenty of demand’

By Aaron Weitzman
Christine Albano

Published April 18 2019

Next week’s calendar should benefit from timing and availability of paper coming on the heels of both the income tax deadline and the holiday-shortened week.

Munis will be very much on the minds of lots of people who paid larger bills due to the state and local tax changes, which may increase demand for next week’s slate, according to John Mousseau, director of fixed income at Cumberland Advisors.

“One way to combat that is to own more tax-free bonds,” he said, indicating that the market next week will absorb new supply with ease.

Overall, he said the market may be poised for a change from the current norm.

“The strength the market has experienced has to abate somewhat,” Mousseau added. “This is just some normal reversion to the mean.”

He noted that visible supply has averaged $7 billion so far in 2019.

“This is all very navigable for the market,” Mousseau said.

Continue reading (with subscription) at The Bond Buyer website: www.bondbuyer.com




SALT-Fueled Rally in Muni Market Faces Tax-Day Test

Excerpt from bloomberg.com article,

SALT-Fueled Rally in Muni Market Faces Tax-Day Test

By Amanda Albright
April 1, 2019

The rally in the $3.8 trillion municipal-bond market is about to face a major tax-season test. All year, analysts have credited the $10,000 cap on state and local tax deductions for driving a record-setting amount of cash into tax-exempt debt as investors look for ways to cut what they owe to the federal government. The wave of money helped propel a five-month rally that’s pushed yields on some municipal bonds to the lowest against Treasuries since at least 2001.

“The demand side has been big,” John Mousseau, chief executive officer and president of Cumberland Advisors, said in an interview. “The market is a little bit vulnerable to a backup in yields and a bit of a selloff.”

 

Read the full article at the Bloomberg website: www.bloomberg.com

 




Mousseau: The SALT (state and local taxes) conundrum

Excerpt from the Sarasota Herald Tribune’s article,

Mousseau: The SALT (state and local taxes) conundrum

There have been headlines recently describing the drop in state tax revenues versus forecasts for some of the higher-tax states such as California, New York, and New Jersey. Part of the falloff is due to an exodus of higher-income residents from high-tax states, such as the ones above, for states with low or no income taxes, such as Florida, Texas, and Nevada.

Exacerbating this effect is the SALT provision of the 2017 tax bill (in effect for the 2018 calendar tax year). It puts a $10,000 cap on the amount of deductible state and local income taxes and local property taxes. This cap, of course, effectively raises the effective rates of these taxes by an amount equal to the loss of deductiblity.

Prior to this year, being able to deduct state and local taxes in full meant that taxpayers subject to the old 39.6 percent highest marginal tax rate effectively wrote off almost 40 percent of their taxes. The SALT change means that, on a cash-flow basis, both people’s property taxes and income taxes will effectively rise almost 40 percent from what they paid last year. For obvious reasons, this new tax bite has generated much consternation and many crosscurrents.

Continued…

 

Read the full article at the Sarasota Herald’s website: www.heraldtribune.com

 




The Slow Housing Market Can Hurt Government Revenues, But Doesn’t Have To

The Slow Housing Market Can Hurt Government Revenues, But Doesn’t Have To

How much home sales impacts a place depends a lot on its property tax policies.

by February 21, 2019

Excerpt below.
Cumberland Advisors John Mousseau

Home sales have been ticking down for months. It’s been particularly bad in the West, where 15 percent fewer homes were sold in December compared to the previous December. The slowdown is widely expected to continue, but how it affects local governments will differ.

Cumberland Advisors CEO John Mousseau is watching places where wealth is concentrated and where taxes are high, including Boston, New York City and its suburbs in Northern New Jersey and Fairfield County, Conn. Homeowners in these places are no longer getting the tax breaks they used to on their properties. “As long as there’s no recession,” he says, “I think home prices in places like these will stagnate or maybe even decline a little.” That could further hurt the local government’s property tax revenues.

But declining home prices aren’t necessarily a bad thing, Mousseau says. According to Fitch’s data, several major markets — including many out West — are currently overvalued. “I think what you’ll see is a realignment of house prices,” he says. “The idea that house prices can go up 6 or 7 percent a year — I think that’s going to go away.”

Read the full article at governing.com.


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Deals pour in to slightly firmer market

Excerpt from…

Deals pour in to slightly firmer market

By Aaron Weitzman
Christine Albano

Published January 15 2019, 1:50pm EST

New deals were rolling in, with timing benefiting issuers as the market firmed.

Strong demand will likely lead to oversubscriptions on the Pennsylvania Housing Finance Authority deal after a significant portion of the longer maturities were spoken for in Monday’s retail order period, according to John Mousseau, president and chief executive officer of Cumberland Advisors.

Orders were two times oversubscribed for the 2044 maturity, which was priced at 4% and seven times oversubscribed for the 2047 maturity, which was priced at 4.05% in the retail order period.

Mousseau predicted Tuesday’s institutional pricing would result in the 2047 maturity being bumped five basis points to 4%.

“Most deals have had very good follow through,” Mousseau said late on Monday.

“With January 1 rollover dwarfing new issuance, it’s usually a good seller’s market and this January is no different,” he added.

Continue reading (with subscription) at The Bond Buyer website: www.bondbuyer.com




Climate change, a rising tide affecting the muni market

Excerpt from…

Climate change, a rising tide affecting the muni market

By Sarah Wynn
Published January 08 2019, 12:45pm EST

WASHINGTON — Portfolio managers are feeling the heat when it comes to investing in bonds that could potentially be affected by climate change.

Climate change has long been a point of political and social contention, and investors are throwing caution to the wind when making important bond transactions, while using a green thumb to do their part.

With his clients, Mousseau said he discusses climate and infrastructure, especially when it comes to residential developments along the coast.

“Just as a matter of policy, we generally try to avoid credits that are particularly vulnerable along any coasts,” Mousseau said.

Instead, he believes in diversifying by owning county bonds or multiple types of utility bonds, as opposed to smaller general obligation bonds that could get wiped out by a hurricane.

Mousseau said there will be an increase in green bonds — bonds used specifically for climate and environmental projects —and more institutional clients are starting to ask for them.

“I think there’s a heightened sense of people wanting to be involved in investments that benefit the environment and I think that grows every year,” Mousseau said.

Millennials, in particular, have shown interest in green bonds, which could cause a rise in issuance.

Development has increased in energy market countries and Mousseau believes green bond initiatives will become more important.

“All I’m saying is that the idea of green bond initiatives is certainly not stopping here,” he said.

Continue reading (with subscription) at The Bond Buyer website: www.bondbuyer.com




The November Bond Market Bounce

Here’s our first take after the midterm elections. The last three weeks of November have seen a bounce in the bond market, with intermediate and longer bond yields falling after spending most of 2018 rising.

Market Commentary - Cumberland Advisors - The November Bond Market Bounc

 

If we look at the US Treasury market (chart 1), we can see the rise in Treasury yields – across the board – from the end of 2017 to early November. A lot of this rise, in our opinion, was to give yields some competition with equity markets, which were certainly frothy early this year, in January, and then in late summer into September. In addition, better growth numbers for the economy, associated with last years’ tax cut, also helped push yields higher. However, core CPI is at 2.1% – approximately where it was at the time of the election in 2016 – though in early November the 10-year US Treasury yield was about 100 basis points higher, at 3.25%, than it was two years earlier. Thus, REAL yields had risen approximately 1% during this time period.

The November Bond Market Bounce Chart 01
Chart 01

 

Since early November we have seen 10-year US Treasury yields fall from 3.25% to 3% and 30-year US Treasury yields fall from 3.45% to 3.30%. Shorter yields have also declined. What’s going on? We think a number of factors are changing investors’ expectations about rates.
—(1) A slightly softer tone by the Federal Reserve is shifting expectations. While we expect to see the Fed raise the fed funds target in December to 2.25–2.5% percent, the markets certainly seem less married to the idea that we will see three or four rate increases next year.
—(2) Volatility in the equity markets has, we believe, led to some switching into bonds at the margin. Certainly, interest rates that are 80 basis points higher than at the start of the year and even HIGHER on a REAL basis have started to attract interest.
—(3) Previously hot real estate markets in the northeast, California, and other “hot” areas have now cooled. Homes that a year ago were often on the market for 4–5 weeks at most are now on for 4–5 months, and that time is lengthening. Bidding wars are now a thing of the past; and while the housing market may not be fully a buyers’ market, it has clearly transitioned from a sellers’ market. We think the provisions of last year’s tax bill, which dictated that state income taxes and local property taxes will no longer be deductible on federal taxes, are starting to have an effect now that we are less than six months from tax day. Clearly, areas that have high relative property taxes are grappling with what is now a higher after-tax cost of owning a home. Higher mortgage rates this year have also contributed to this cooling,
—(4) The market is reckoning with the fact that the increasing US government deficit will start to have ramifications that were not present over the past half dozen years.


In the charts above we see the growth in outstanding US government debt and Congressional Budget Office projections for future growth. We can see the growth of outstanding federal debt from $10.7 trillion in 2008 to an estimated $21.4 trillion at the end of this year. However, the net interest expense on that government debt barely budged between 2008 (at $252 billion) and 2017 (at $262 billion). But note the large jump this year and going forward. Interest expense on the government debt barely rose in the last decade because of ultra-low interest rates, particularly on shorter-term debt. The jump in interest expense going forward is a function of the higher interest rates in force today.

The November Bond Market Bounce Chart 04

For example, the above graph shows 5-year US Treasury yields going back more than a decade. Bonds that were issued in 2007 at 5% could be replaced when they matured in 2012 at a little more than 0.5%. We are now going the other way. Five-year notes that were issued in the middle of 2013 at around 1% were being replaced this year at almost 3%. This extra interest expense could act as a wet blanket on an economy that is still growing because of lower unemployment and tax cuts.

We think all of this activity has caused investors to ratchet down expectations. We have extended durations within our barbell strategy during the past two months and believe there are forces that should keep intermediate and longer-term interest rates in a trading range, with a bias to going lower. We believe that, with long Treasuries at 3.30%, longer tax-free municipal bond yields in the 4% range still represent excellent value – particularly in high-tax states that will be grappling with the SALT provisions of the tax bill.

We wish all our readers a great holiday season.

John R. Mousseau, CFA
President and Chief Executive Officer, Director of Fixed Income
Email | Bio


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Cumberland Advisors Week in Review (Nov 26, 2018 – Nov 30, 2018)

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team. These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

Week In Review

MATT MCALEER’S WEEKLY RECAP

Matt gives us the latest from the Equity Desk In this Week In Review for November 26-30, 2018. Our Director of Equity Strategies for Cumberland Advisors tells you how he’s trading and shares some forward thinking. WATCH HERE.

Cumberland-Advisors-Matt-McAleer-Market-Position-Broadly


 

MARKET COMMENTARY

 

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FEATURED VIDEO


John Mousseau joins Matt McAleer this week for a discussion about his week in bonds.

The video is available here.


IN THE NEWS

 

 

 

 


IN CASE YOU MISSED IT

 

    • Bitcoin price WARNING: HILARIOUS moment investor compares cryptocurrency to CHOCOLATE COIN

      David Kotok 1/04/2018

      BITCOIN is as tangible as a chocolate coin a top investor has warned in a hilarious quip about the cryptocurrency. Appearing on Bloomberg, Mr Kotok offered the hosts a “New Year’s gift” – a chocolate coin shaped like a bitcoin. Handing out the sweet treat, he said: “I brought proof that bitcoin can be tangible, here’s a New Year’s gift for each of you.” The delighted presenters asked if the gift was chocolate. Mr Kotok said that the chocolate version of the cryptocurrency had more value than the real thing. He said: “That is a chocolate covered bitcoin, that is the most tangible value you will see in bitcoin.”Continued…

 

  • Europe’s Migration Crisis

    Bill Witherell 12/15/2015

    A European perspective on the complex societal challenges now confronting Europe as it seeks to address a humanitarian crisis and heightened security risks. A reader shares, “In every institution, including education, we take for granted that men and women will mix and work together. My friends’ children are off dating each other and staying over at each other’s houses. Think about this very specifically and you see that the whole basis of social organization will come under pressure if migration continues, or is allowed to continue, on the scale which seems likely. Think about business life, and you’ll see the same thing. The questions to ask are these: How many will come, or try to come, in the coming years? How will they try to live when they get here? What will the reaction of Europeans be? How will all this affect enterprise, investment, and credit ratings?” Continued…

 

 


 

UPCOMING EVENTS

 

    • Adapting to a Changing Climate

      From hurricanes to red tide and sea level rise, learn how a changing climate affects the Sarasota-Manatee region and the state of Florida. Expert speakers will discuss the challenges and impact on Florida and other coastal communities while uncovering the adaptive strategies that bring unique social and economic opportunities. The featured speaker is Bob Bunting, CEO Waterstone Strategies/Scientist/Entrepreneur – January 25, 2019 – Selby Auditorium, USFSM , 8:30 am – 3 pm. Lunch is included. Cumberland Advisors is a sponsor and Patricia Healy, CFA, from our firm will discuss “Climate, Municipal Bonds and Infrastructure” with the audience. Details Here.

 

  • U.S. Manufacturing in a Global Context

    Save the Date! GIC is returning to Sarasota, FL on Friday, February 1, 2019 to partner with the Financial Planning Associates of the Suncoast and Cumberland Advisors. Join us at the Sarasota Yacht Club as we welcome Bill Strauss, Senior Economist and Economic Adviser of the Federal Reserve Bank of Chicago, for a presentation on U.S. Manufacturing in a Global Context. Strauss is a senior economist and economic adviser in the economic research department at the Federal Reserve Bank of Chicago, which he joined in 1982. His chief responsibilities include analyzing the current performance of both the Midwest economy and the manufacturing sector for use in monetary policy. Details Here.

 


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Investors speculate on return of crisis-era Build America infrastructure bonds under split Congress

Investors speculate on return of crisis-era Build America infrastructure bonds under split Congress

This infrastructure-bond structure, backed by federal subsidies, could face uphill battle in Congress.

With Democrats sweeping into the House in the midterm elections, analysts are touting the potential comeback of crisis-era municipal bonds as part of a broader infrastructure bill.

Talk of major infrastructure legislation has gained ground as investors marked it out as the rare area where Democrats and President Donald Trump shared common ground. That has drawn speculation of the potential re-introduction of Build America Bonds, taxable municipal bonds issued by local governments to finance infrastructure projects, that came to life in 2009 when former President Obama launched a wave of fiscal stimulus measures to revive a recession-hit economy.

“It may be brought back in some form,” said John Mousseau, director of fixed income at Cumberland Advisors.

The need for infrastructure spending has been felt on both sides of the aisle.

Mousseau pointed to the strong demand for recent multibillion dollar bond sales funding a new terminal in New York’s LaGuardia airport and a replacement for the Tappan Zee bridge, both of which relied on a mix of taxable and tax-exempt municipal debt.

“Big deals have had no problem selling bonds,” said Mousseau.

Continue reading at MarketWatch’s website: www.marketwatch.com




Midterm Elections – The Quick Muni Note

Here’s our first take after the midterm elections.

Market Commentary - Cumberland Advisors - Midterm Elections – The Quick Muni Note

The polls actually got it right, with the Democrats taking the House of Representatives and the Republicans enjoying a slight pickup in the Senate.

Divided government, with different parties in control of the House and Senate, has sometimes led to gridlock.  It also tends to keep spurious legislation from being passed; and so overall, markets are OK with this outcome.

 

Regarding munis, we feel that this election certainly eliminates the concern that a Republican House would have introduced legislation to cut income taxes further.  With the Dems in control of the House, that notion is off the table; and fears that tax-exempt munis would suffer price erosion from lower marginal tax rates should dissipate.

From a spending standpoint, the divided Congress will most likely keep the President’s spending in check, and this may slow the current rise in the deficit (a good thing from our perspective).

We’re still checking final results, but we know that California voters rejected almost $9 billion in bonds for water projects, and Colorado rejected over $3 billion in a transportation bond.  There’s more to come on this issue of bond rejections, but our thought is that the specter of the SALT provisions of last year’s tax bill is forcing voters’ hands. If state income taxes and local property taxes are no longer deductible, anything that raises the level of spending and potentially higher taxes is likely to get a cold shoulder, as people’s EFFECTIVE taxes will rise in any case with SALT provisions.

We do believe that with the current low unemployment level, a national infrastructure program with federal subsidies is not needed and is now more unlikely with divided government.  We have seen large infrastructure bond deals done in the past year in the municipal market, and the issuers have had no problem selling the bonds.

Coming out of the elections, we feel especially constructive about longer-term tax-free bonds. With longer tax-free munis yielding over 4%, and with a taxable equivalent yield of 6.35% and muni/Treasury yield ratios of almost 120%, we feel longer tax-free paper is a real bargain and continue to manage portfolios in a barbell fashion, with longer-maturity bonds being a focal point.

The large December and January reinvestment periods are almost upon us. Supply is running 15% behind last year, and that will be another positive force for the market, along with the core inflation rate, which has been dropping for two months.

More to come.

John R. Mousseau, CFA
President and Chief Executive Officer, Director of Fixed Income
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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