Market News Commentary - From The Desk of David Loesch 11.27.2018Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on November 27th, 2018
• Rising rates impact many. Mortgage applications are dropping at an all-time record pace, 3.20% for the past week of 11/14/2018. As we see rates move up and the FED indicating that they will continue to raise (next hike coming Dec 2018) many inventors in both stocks and homes see this as negative news. Homebuilders, companies who borrow, people with credit card debt and bond investors are all feeling the sting of rates moving higher. Speculation on land with MUD district and LID’s can be troublesome if they are relying on builders to “take them out” of the transaction.
• Democrats announced the week of 11/14/2018 that they would use their power in the House to argue for raising the corporate tax rate by a “few” percentage points. This is a long shot; however, if enacted, it could cause the tax cut that was passed in 2017 to become unraveled. For now, this is a political talking point as the agenda is set for 2020 elections; however, it is going to be a hot topic as we move into 2019 and will impact not only individuals but also all markets.
• Chicago BOE plans to sell 763.3MM of GO debt, 450MM will refinance previous bonds and 313.3MM will used to pay or reimburse the boards general operating budget expenditures.
• The head of CA public utilities commission indicated that he could not imaging allowing PG&E (The states largest utility) to go into BK as it faces billions of dollars in potential liability and repairs from the wildfire.
• NY States budgets deficit could be 500MM more than projected because the state did not take into account additional spending on education. This could cause ratings to change per Moody’s.
• NY sales tax and personal income tax bonds were downgraded last week due to revenues “might not receive priority” in cases of distress such as PR. The Rating was cut to AA+ from AAA, many other states are being looked at by S&P for a downgrade due to senior liens and priority revenue streams. This will impact many MUNI’s, although no BK’s will come of it, it will shake the system.
• S&P indicated that they might cut PG&E to junk in the next few months. They are calling for an at least 50% downgrade based on the CA fires.
• NY will sell 1.2B of GO bonds on 11/29; these will refund existing bonds while also providing funds to improve streets within the city.
• Amazons decision to split its second headquarters between Queens and Arlington VA is a credit positive for both regions. The areas should see significant population gains as well as tax gains.
• PR continues its march towards exiting BK, the sales tax bonds are the latest structure to continue to gain approval from regulators and dealers. The overall plan on Tuesday 11/21/18 was submitted to bondholder for a vote; larger investors hold 10B of the 17B sales tax bonds known as CoFina. As we move into this next chapter of PR, it will continue to help all insurers gain traction with their finances.
• COFINA financing plan will likely win approval of its proposed plan of adjustments this week. There are issues with the subordinate bondholders however I do not think this will get in the way; the deal ensures a 17B in debt service savings over the next 40 years.
• PR announced today 11/27/2018 that in January they would start to emerge from BK starting with the Cofina bonds. There will be a debt exchange for the uninsured bonds; I believe that over time (first three months of 2019) you will see a call on the insured paper that is currently callable now.
• MUNI bond insurance is likely to hit 375B in 2019; this is a 7% increase from the amount expected this year in 2018. As PR exits, and other BK’s not on the horizon (Chicago) you will see insured paper move up nicely in 2019 with all things considered in a rising interest rate environment.
• The FED continues to backpedal on rate moves in 2019 as recently as Monday this week. The original call for 4-5 rate hikes is now 3-4. As the FED examines the overall economy and watching GM lay off 14K employees yesterday, the overall engine that drives the economy might not be in as good as shape as one would have thought initially.
• Trump indicated that he is highly unlikely that he will “delay” any tariffs. There is a G20 meeting this week, and this will be the main point of discussions. Many fear that with the tariffs you will see added pressure on the equity markets. These tariffs have started, and additional tariffs will come – this should help our markets.
It would be my pleasure to speak to you directly about the current markets and how The DRL Group can be of service to your fixed income investment portfolio. To schedule a time to talk, please email me at firstname.lastname@example.org.
This content is based on the opinions of David Loesch based on his review of articles from Bloomberg.com or CNBC.com.
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