Municipal bond investors beware!
On June 14, it was announced that Detroit will not make a $39.7-million payment on unsecured municipal bonds worth $2.0 billion. This makes Detroit the most populated city to default on its debt, after Cleveland, since 1978.
The Emergency Manager, Kevyn Orr, who was sent by Michigan state to look over Detroit’s budget deficit told reporters in a news conference on June 14, “We have to strike a balance between the legacy obligation to our creditors, our employees and our retirees, and the duty we have as a city to 700,000 residents to give them lights, police, fire, emergency management, clean streets.” (Source: “‘We’re Tapped Out’: Detroit Emergency Manager Proposes Plan to Creditors,” CBS Detroit web site, June 14, 2013.)
As horrific as this news may be to the mainstream media and the politicians who say the U.S. economy is getting better, it shouldn’t be a surprise to Profit Confidential readers in any way. I have been harping on about the growing problem of cities and municipalities in financial trouble in the U.S. economy, and their effects on the municipal bond market, for some time now.
The “Motor City” defaulting on its debt obligation is certainly a big issue, but it isn’t the only place where municipal bond holders are facing losses. Cities like Stockton, California have already filed for bankruptcy due to their inability to control their budget deficits.
Jefferson County, Alabama, which previously filed for bankruptcy, recently came to a decision with its municipal bond holders. It has decided that the largest creditors will only receive 60% of what the city owed.
Gone are the days when municipal bonds were considered a great investment with significant tax advantages. The $3.7-trillion U.S. municipal bond market is facing threats. Detroit defaulting on its debt obligations is just adding fuel to the fire.
D… Read More
This week marks the unofficial beginning of second-quarter earnings season as Oracle Corporation (ORCL) reports. Next week, it’s NIKE, Inc. (NKE).
These two benchmark companies offer the first glimpse of business conditions for multinational corporations. What they report is material.
Last quarter, NIKE surprised Wall Street with excellent relative growth in revenues and earnings, particularly in the North American market. Oracle came in just under consensus. The stock’s been treading water for the last several months.
Corporations have been coy with their earnings guidance, both out of the collective uncertainty regarding the economy and to make it easier to beat the Street. It’s always a delicate dance that corporations play with investors. Earnings are definitely managed, which is why it’s important to look at cash flow and other financial metrics to get a better understanding of a company’s performance.
If there’s one trend apparent in the financial results of large corporations, it’s that balance sheets have been getting stronger. And this bodes extremely well for dividend-seeking investors. I have a strong inclination this earnings season that we’re going to see continued increases in dividends and expanded share buyback programs to pay for them.
Generally speaking, I wouldn’t be buying this market, but I wouldn’t sell blue chip positions either. Market timing is always extremely difficult, but it’s pretty tough to make the case that stocks aren’t due for a break.
While there’s been some peculiar trading action over the last week in global capital markets, there is still an appetite on the part of big investors to buy stocks if earnings meet or beat consensus.
First-quarter earnings season saw corporations report revenues that were mostly underwhelming. Some of the best blue chips like Johnson & Johnson (JNJ) and PepsiCo… Read More
China’s economy is slowing, but the rich in that country continue to get richer and are growing in number. I was reading the other day that Chinese investors are now some of the biggest purchasers of high-end real estate in the United States—Manhattan, in particular. It would not be a surprise to see a buyer from China lay down $10.0 million cash for a Manhattan loft after their first visit. Trust me: the money out of China is staggering and will only grow bigger.
Yet the super-rich may surprise you. Out of the approximately 200 billionaires in China, about 83 are politicians, so you know who really runs the country and is getting rich. (Source: Anderlini, J., “Chinese parliament holds 83 billionaires,” Financial Times, March 7, 2013, last accessed June 17, 2013.) That’s unbelievable, and you know that these wealthy politicians probably can do whatever they desire, worrying very little about any conflict of interest.
China also has about 1.3 million millionaires—which trails the United States at 5.9 million and Japan at 1.5 million, according to the Boston Consulting Group. (Source: Barris, M. and Jing, S., “China to Top Japan in millionaire stakes,” China Daily, June 1, 2013.)
For Father’s Day, you can satisfy your appetite with a three-course dinner at Morton’s at The Regent Hotel in Beijing for US$135.00, or how about champagne, wine, and beer for $80.00 each at the Senses Signature restaurant at The Westin Beijing.
But while the country is seeing a renaissance in wealth creation at a pace never seen in the history of the world, the fact is that 70% of the country can still only dream of a dinner at Morton’s. It would take months for the worker in the fields to earn enough for a meal at Morton’s.
Make no mistake about it; the wealth creation out of China is unbelievable. And trust me: it’s going to continue to grow as the gap between the rich and poor broadens furth… Read More