Market Commentary: The Kicker

The New Orleans Saints announced that its Hall of Famer Thomas J. Dempsey died on Saturday at age 73 from complications of COVID-19 just ten days after being diagnosed. Dempsey was a placekicker who signed with the club in 1969 as an undrafted free agent out of Palomar College. During his rookie season the following year at Tulane Stadium in a game against the Detroit Lions when his team was behind 17-16 with only second left he took a snap from Jackie Burkett and kicked a jaw-dropping 63-yard field goal that stood as an NFL record for 43 years. Over his career with the Saints, the Eagles, Rams, Oilers and Bills, the Milwaukee native aced 61.6% of his field goals and 89.4% of his extra point attempts using an old-school kicking style that differed from most others in the NFL. Instead of a soccer style boot from the laces, he preferred the straight toe approach. But, since he was born without toes on his right foot, he wore a flat-front shoe custom designed to accommodate his disability. Some thought that gave him an unfair advantage. Others shook their heads in marvel. After 11 seasons in the NFL, the good-humored man nicknamed “Stumpy” by his teammates retired in 1979 and went on to work as an oil field salesman and run a car dealership. He was diagnosed with dementia in 2012 and came to reside at the Lambeth House assisted living center in New Orleans where he was one of 50 to be stricken with coronavirus, one of 15 who has died there in quarantine, apart from his wife, sister, three children and three grandchildren except in video chats. The sad human toll of the pandemic exceeds 1.4 million cases worldwide, 400,000 in the U.S. at this writing, with more than 82,000 deaths including nearly 13,000 Americans. The economic toll mounts as well. Our nation’s spectacular 10-year expansion came to an abrupt halt in March as every aspect of society has been disrupted in the effort to contain the spread of the virus. Apart from the incalculable loss of human life, the worldwide cost may exceed $4 trillion and 4.8% of combined gross domestic product. Talk often kicks up a notch from recession to depression, but all estimates still hinge on a range of unknowns. In the meantime, most manufacturing, employment, education, and services are at a virtual standstill. Oil price wars compound the troubles. In times of uncertainty, investors turn to the safest havens but leap into risk on hopeful news: progress with a vaccine, interim measures that appear to save lives, down-ticks in case counts, timetables for the loosening of restrictions that will allow us to kick-start our lives again, the next massive government stimulus rescue package and trillion-dollar central bank intervention. Since the start of the month, stock indices have risen by as much as 3.4% on optimism for the turnaround and a return to old routines. The Dow is up 736 points, the Nasdaq up 187 points, the S&P 500 up 75. Oil prices have increased more than 17% to $23.63 a barrel. Gold prices have gained $54 an ounce. Volatility remains elevated, a function of medical, economic and fiscal pronouncements. Relative value is constantly shifting and often irrelevant in period of illiquidity caused by large institutions placing massive sell orders into markets unable or unwilling to absorb the supply and, at moments, shocked by the strategies being revealed and unwound, deleveraging and re-leveraging. Whether measured in the thousands or trillions, investment accounts are being kickboxed from week to week. There are opportunities and risks galore. The world’s safe haven, U.S. Treasuries, have lost some ground so far this month. The 2-and 10-year yields have inched up a few basis points to 0.26% and 0.71%, respectively. However, the 30-year has strengthened with yields dropping by 5 basis points to 1.29%. The corporate bond market is extremely active; firms are tapping lines of credit and issuing investment grade bonds at a breakneck pace. In spite of all the predictions for a dramatic increase in the number of “fallen angels,” or bonds dropping from BBB ratings to below investment grade as a result of pandemic-induced losses, and “sinking demons,” or bonds and leveraged loans falling from B ratings to CCC levels, the BBB-rated corporate bonds are flat on the month with 10-year yields at 4.61%. Municipal bonds are operating in almost a parallel universe from governments and corporates where there is explosive new issuance. The primary tax-exempt calendar has been quiet for weeks. Several top rated issuers are able to access the markets in negotiated and competitive sales while lower- and non-rated issuers are on hold or seeking to privately place their debt. All the action is in the secondary market where bid-wanted lists are large and trading is active. The market is sometimes schizophrenic, moving unpredictably from oversold to overpriced, with so many technical factors at play, not the least of which is speculation over the future credit quality of state and local issues in the era of COVID-19. Mutual funds have experienced $13.8 billion of outflows in the past two weeks; municipal ETFs have suffered net withdrawals for the past five. So far this month, the AAA general obligation tax-exempt muni yield has dropped by 2 basis points to 1.04%, the 10-year is up 5 basis points to 1.38% and the 30-year yield has increased by 20 basis points to 2.19%. Nontraditional buyers, called crossovers, such as insurance companies find newfound appeal in munis given the outsized ratio to Treasury yields. At this writing, the 1-year ratio is 507%, the 10-year ratio is 189%, and the 30-year ratio — with the Treasury at 1.29% and the comparable tax-exempt muni at 2.19% — is 170%. These are indeed extraordinary times. At HJ Sims, our team stands alongside you, your families, your businesses and employees. We are not on the sidelines but fully engaged in the financial markets. Our traders find pockets of opportunity in every session and our advisors have use of stress testing tools to help our clients analyze portfolios and diversify as needed. We encourage you to enhance your dialogue with your HJ Sims representative and take comfort in the strategies that we develop together. But for now we pause during this holy season of Easter and Passover to wish you safe and happy celebrations, be they at home or on line, together with those most dear.

Market Commentary: Profiles

Our local newspapers have begun to publish touching profiles of community members lost to the coronavirus in much the same way as The New York Times featured those lost on 9/11, with a snapshot taken on a happy day and recollections of unique achievements during lives so sadly cut short. This time: veterans, ballplayers, cops, teachers, musicians, transit workers. Tributes to those whose lives will only be celebrated with the gathering of family and friends in days ahead when conditions permit. Plans are also being made for ticker tape parades in cities like New York to honor the doctors, nurses, EMTs, police, fire and other public safety officials who are risking their lives to protect and care for others. Some of those who do not make it to the front pages for acclaim are the millions of family caregivers tending to those battling chronic illnesses as well as the disabled, the elderly and the very young. Unpaid family caregivers are said to be the backbone of our health care system, providing as much as 90% of all home health care for no pay or public honor. This amounts to 30 billion hours for the 44 million Americans, including more than 1.3 million children, who take care of others in need while trying to stay healthy, work, go to school, or look for work. Approximately 12.3 million are sandwiched between aging elders and young children, some for the first time right now, facing challenges and navigating crises with little, if any, outside help, day in and day out.

There are some 15,600 nursing homes and 28,900 residential communities caring for many of our most frail elderly and disabled as well. Some of these facilities, particularly in New Jersey and Massachusetts, have been hit very hard by COVID-19 outbreaks, while others struggle mightily to protect residents and staff, incurring significant, unbudgeted expenses for supplies and labor, trying to manage what at times seems unmanageable. A recent unofficial count found more than 4,000 facilities and 36,500 residents and staff with cases that have been reported to states and counties. These numbers also point to the majority of communities and several million residents that have not been or may not be affected.

Having accurate and timely case information is critical for residents, families, local citizens, policymakers and the industry as a whole. At the federal level, the Centers for Disease Control and Prevention has just started to receive data on COVID-19 cases in long term care facilities under a directive that went out to nursing homes on Sunday from the Centers for Medicare & Medicaid Services. CMS is also finally mandating that facilities notify residents and families of this information. It is hard to believe that this data was not required earlier. But it is hard to believe a lot of the things we are seeing today across the country and around the world. No sector of our economy, no part of our day-to-day lives, has been unaffected by this scourge on the Earth. We applaud those facility managers that are being the most pro-active with residents, families, public health officials, and investors, making timely, regular, and comprehensive disclosures of medical, operational, and financial conditions. The profiles of well-prepared, well-managed, and resourceful communities with a culture of open communication will be long remembered and held as a standard for all others as we face the challenges ahead.

There is no reliable profile of the financial markets right now. We are seeing things never seen before as a result of this virus and the policy chokeholds imposed on our economy. Record unemployment claims. Record low Treasury yields. Negative oil prices. Unprecedented outflows from municipal bond funds. Historic corporate bond issuance. It is hard to know from day today what to expect by the close. But since the start of this month just about everything other than oil is up, buoyed by phased increases of federal stimulus and the active presence of the major central banks who have bought more than five times the amount of assets they did during the Great Recession. It has by no means been a smooth rally but, at this writing, the Dow is up 8%, the S&P 500 9%, the Nasdaq 11%, the Russell 2000 5%, and gold 6%. Bond prices are also up. The 2-year U.S. Treasury yield has fallen 3 basis points to 0.20%. The 10-year yield is down 7 basis points, and the 30-year has dropped 13 basis points to 1.21%. The 10-year Baa corporate bond yield has plunged 36 basis points to 4.24%. In the municipal market, the 2-year AAA general obligation benchmark yield has fallen 21 basis points to 0.85%, the 10-year is down ever more at 26 basis points to 1.07% and the 30-year has dropped 9 basis points to 1.90%. The AA taxable municipal bond, attractive for many retirement accounts, yields 3.14%, down 24 basis points since the start of April trading and well above the comparable AA corporate at 2.55%.

There has been very little municipal new issuance this month, but we are very active in the secondary market for tax-exempts as well as taxables, including corporates. The sheer quantity of bonds being offered in sectors being battered by newspaper headlines make it difficult at times to distinguish the good credits from those that were already struggling and may come under greater stress. Whether it is utilities, hospitals, transit, colleges or senior living — where most of our industry expertise lies — we have the credit analytic capabilities to pick out those bonds which we believe have the most enduring value and offer above average streams of income. We encourage you to contact your HJ Sims advisor to update your investment and risk profiles as well as your capital needs, and exchange views on current market opportunities.

Market Commentary: The Flavivirus of 1793

Toward the end of the 18th century as the new, permanent capital of the United States was being designed and built in the District of Columbia, attention was still focused on Philadelphia. It was the temporary capital after the Constitution was ratified, the hub of the new nation boasting 50,000 citizens, the largest city in the country and the second largest in the English-speaking world. But in the dry, hot summer of 1793, refugees arriving at America’s busiest port from the Caribbean islands brought with them a deadly scourge. The epidemic of yellow fever first attacked those who lived and worked on the waterfront and swiftly spread, carried and transferred by mosquitoes ravaging the city during the summer and fall, eventually claiming one in ten lives. President Washington, his Cabinet, Members of Congress and 20,000 others who could leave fled to the countryside. Those in other cities fearful of contracting the disease boycotted the entire area. The flavivirus was said to have originated in Africa and first came through the West Indies to North America in the late 17th century. Outbreaks afflicted those trading with the Caribbean for the next hundred years. But it was not until the deadly contagion hit Philadelphia that year when the cause and potential means of controlling it were debated. The city established a Board of Health to enforce sanitary regulations, but these met with little success. The federal government had no authority to act, the governor fell ill, the state legislature skedaddled, and so it was left to the mayor and a ragtag committee to try and save the citizens of the city. Little respite was had for more than three months until the winter frost came and put a temporary end to both the mosquitoes and the fever. The pestilence returned seven times in the next 12 years, producing familiar patterns of finger-pointing, evacuation, and isolation, eventually relegating what would late become known as the City of Brotherly Love to second tier status as a port. For many years, the cause and means of transmission were not known and there was no vaccine or treatment, although bleeding, purging, cleaning, blistering, vinegar camphor, mercury and jalap, opium, wine and quarantines were all prescribed.

Fast forward 227 years when the nation’s capital — and every great American city — has been hit by plague again. The novel coronavirus has effectively shut down the nation for 34 days and counting. This time, there is no safe place to escape. Although the cause and source are said to be known this time, the cure remains elusive and fear has spread alongside the disease. A second wave is possible but the prospect of annual recurrences for the next decade is unthinkable. Instead of boycotts, there are lock-downs that have shuttered schools and non-essential businesses. Social distancing, handwashing, gloves and masks, online learning, telemedicine, and home deliveries will be with us for a long while. The toll COVID-19 is taking will be measured in precious lives, once proud businesses, and a legacy of debt. Debates will continue for years if not generations as to when to impose and how to remove quarantines, whether policy cures are worse than the disease, what we need to do to prepare properly for the next one. Massive central bank action in close coordination with the Treasury has again set new standards for intervention in free markets and municipalities that have long treasured independence and self-reliance. It will prove difficult to not to look to them again when the next sniffle occurs or the next proverbial ship with a cargo of pestilence limps into a U.S. port.

Our nation’s healthcare leaders note that America is still on the upward slope of The Curve with a short way to go before case counts, hospitalizations and death rates slow. It was only seven months ago that we were laser-focused on another curve, the Treasury yield curve, when it inverted during a very different liquidity crisis last September. Since the President declared a national emergency on March 13, the markets have experienced extreme volatility as fear and uncertainty gripped the world. During the flights between safety and risk, the S&P 500 has risen 50 points to 2,761, the Nasdaq is up 317 points to 8,192, and the Russell 500 has gained about 2 points to stand at 1,212. Gold prices are up $184 an ounce to $1,714. Oil, primarily due to the Saudi-Russia production dispute has fallen nearly 30% to $22.41 a barrel. On the bond side, the U.S. 2-year Treasury yield has fallen 25 basis points to 0.24%, the 10-year is down 19 basis points to 0.77% and the 30-year has decreased 12 basis points to 1.40%. Ten-year Baa corporate bond yields have risen 83 basis points to 4.51%. More than $35 billion has been withdrawn from municipal bond funds but the 2-year AAA municipal general obligation bond yield is down 25 basis points to 0.87%, the 10-year has fallen 51 basis points to 1.10% and the 30-year tax-exempt benchmark has dropped 39 basis points to 1.93%.

Corporate bond issuance has been extremely heavy on both the investment grade and high yield sides as firms tap markets and bank lines of credit for as much cash cushion as they can get. Investors concerned with the ability of state, local and nonprofit borrowers to withstand the financial pressures stemming from the pandemic have effectively frozen the calendar for many new municipal issues although higher rated health care, higher education, utility and general obligation borrowers have consistently been able to enter the market. There is a $14 billion pipeline of deals on day-to-day status as investors await fresh disclosure on the status of projects previously financed. How have people and operations been impacted? Is there sufficient cash to meet all day-to-day needs for the next 6 months and pay debt service in full and on time? Buyers heavy with cash from April 1 redemptions are scouring an array of solid credits at attractive prices in the secondary market, including hospital, airport, mass transit, and utility bonds being tarred with the same brush regardless of liquidity position and debt service coverage. Operating under more stringent regulatory structures imposed after the 2008 recession, the major credit rating agencies are revising all sector outlooks as negative and swiftly downgrading those who are slipping below certain trigger points, no matter the cause or expected duration, adding to investor worry and uncertainty. Those who lived in Philadelphia in the late 18th century faced much darker days and more uncertain times. In the case of COVID-19, we do not yet have all the answers but we have a staggering array of federal, state, local, private, and central bank aid to help us handle this crisis and recover. Please continue to count on your HJ Sims representative as a valuable resource and trusted partner throughout this process.

What’s Happening in Puerto Rico

Summary: HJ Sims Managing Director German Ramirez and Senior Vice President Richard Prann focus on the latest developments in Puerto Rico, and discuss what’s been happening with PREPA, COFINA and the GDB, as well as implications for bondholders. Chip Barnett hosts.

The Latest News from Puerto Rico

Summary: German Ramirez, Managing Director and Richard Prann, Senior Vice President of HJ Sims talk from Puerto Rico about the situation on the island, discuss COFINA and the IRS, what’s new with the GDB bonds and with the commonwealth’s GOs. Chip Barnett hosts.

HUD Business During a Pandemic

The COVID-19 virus is having a profound impact on the nation, temporarily, but dramatically, affecting how we live and work. The virus is roiling the capital markets, and policies imposed to slow its spread have ground the economy to a crawl in many quarters. The mortgage banking team at Sims Mortgage Funding has taken to working remotely, linked to each other, our clients and our consulting and business partners electronically, and we will continue to operate this way until the “all clear” sign is announced.

In times of crisis there also is opportunity, and the COVID-19 virus proves no exception. Interest rates for HUD-insured loans have fluctuated wildly over the past few weeks, but the gradual tightening of spreads over the yield on 10-year US Treasuries and steps by the Federal Reserve to ensure liquidity into the government-backed securities markets, improving sale conditions, have created a very favorable climate for interest rates on HUD-insured loans.

How favorable? We are seeing indications of interest around 2.60% for HUD-insured refinancing loans and about 3.30% for construction and substantial rehabilitation loans. Please note that these rates exclude HUD’s annual mortgage insurance premiums, which range from .25% to .77% depending upon such factors as the project type, loan purpose, affordability restrictions, etc. These are terrific rates, reminiscent of what we saw in the HUD-insured loan markets during the Great Recession in 2008.

HUD has taken positive steps to remain operational by working remotely during the COVID-19 crisis. They have established procedures to process mortgage insurance applications and are working with our trade associations and third-party report providers to develop protocols for site and building inspections and appraisals. HUD also has developed arrangements for closings remotely – we’ll soon see how this works as we have a multifamily affordable refinance loan in the Southwest Region just starting the closing process.

HUD’s goal is to conduct business as usual during these difficult times – however, it remains to be seen how the negative economic conditions resulting from a national shutdown of the economy and the effects of COVID-19 on the senior housing sector will impact HUD’s review of new mortgage insurance applications. We are hearing anecdotally that HUD is contemplating increased reserves and other escrows for market-rate construction loans, and potential adjustments to project valuations to account for the impact of COVID-19. More to come there.

One of the central missions of HUD’s mortgage insurance programs is to provide credit support and liquidity to the housing and healthcare/senior capital markets during times of economic difficulty. Given the magnitude of the economic dislocation in the wake of the COVID-19 virus, HUD is expected to play an integral, and necessary, component in our national recovery.

We wish you and your families the best and hope that you are staying safe.

Market Commentary: The Ninth Hole

Hope is slowly starting to fill the holes in every refrigerator, cash register, classroom, orchard, and airplane. As case counts decline and the prospects for treatment or vaccines increase, several states and counties are starting to re-open restaurants, hair salons, movie theaters, gyms, malls, construction sites, health care offices, churches, and parks, many of the places we once took for granted and have since missed dearly. Georgia. Tennessee. Alaska. Iowa. Colorado. Montana. Oklahoma. Utah. Rules are being lifted in phases in other areas for the first time six weeks while many urban areas remain in the early stages of planning. Since December, the COVID-19 pandemic has scorched the earth from Wuhan to Castro Barros, Argentina–inflicting pain and suffering on more than 3 million people, primarily seniors, as well as damage on both local and global economies. One German newspaper put together an itemized invoice for amounts due from China as a result of lost tourism and manufacturing. The State of Missouri is suing the People’s Republic for negligent and deceitful behavior that has led to deaths and losses that were otherwise preventable. In the end, individual states and nations will have to tend to their own wounds. Some parts of the world may take years to recover. Here, the amazing mosaic of sovereign states that comprise our federal republic will re-assemble sooner and stronger than ever.

There is a huge cost that we and other nations will bear, the size and extent yet to be calculated. We have yet to determine where we are in the process of impact and recovery. Are we halfway through, at the ninth hole of an eighteen hole course? Are we on the fairway or still in the rough? Assessing the course and its conditions is a full time job for many economists, industry lobbyists and state budget officers. The National Governors Association has proposed a federal rescue package of $500 billion, an amount that represents more than half of combined general fund spending for all states for the entire year. Members of Congress, mostly back in their home districts, are estimating the local needs. In effort to throw some cold water on the skyrocketing demands, and out of sheer amazement over the audacity of several looking to plug unfunded pension holes, the Senate Majority Leader Mitch McConnell suggested that what may be needed is to extend eligibility for filing bankruptcy to state governments. That gave the talking heads some new material for a few days. In the meantime, the Federal Reserve is issuing so much currency that it has actually become a mathematical impossibility for the Bureau of Engraving and Printing to keep up.

It has been hard to keep up with the directions of the financial markets as well. There are, as always, multiple forces and factors involved. One can explain negative oil prices, for instance, but it is nevertheless astonishing. There are many theories as to why stocks and municipal bond prices have been so closely correlated and why Treasury and municipal prices have diverged since March, but these are also all head-shakers. It has been hard for analysts to find the logic in many of the rallies and selloffs that we have seen in recent months. We attribute some to automated trading based on news flow, fund flows, speculation, and knee-jerk reactions. It seems that we need some new perspective every day on where we are and how we got here. So let us step back and take a look at where the markets have moved since the start of the year.

On the equity side, the Russell 2000 is down 386 points or 23%, the Dow has dropped 4,406 points or 15%, the S&P 500 has fallen 242 points or 2.70%, and the Nasdaq is off by 242 points, just under 3%. Compared with two years ago at this time, the Russell 2000 is down more than 17%, but the Dow is off by less than 1%, the S&P 500 is up about 8% and the Nasdaq has gained nearly 23%. With respect to key commodities, oil prices are down $48 a barrel or 79% since January, 92% since last April, and 81% from where they stood in 2018 at this time. Gold is up across the board with a gain of $190 an ounce of 12% this year and has gained 29% since last year and 29% from April of 2018.

On the bond side, yields are at historic lows. The 2-year Treasury yield has plunged 134 basis points to 0.22% over the past four months. The 10-year has fallen 125 basis points to 0.66% and the 30-year is down 113 basis points to 1.25%. In the past two years, the basis point drop in yields is even greater: 226 for the 2-year, 229 for the 10-year and 187 for the 30-year. Baa-rated corporate 10-year yields currently stand at 4.24% which is 54 basis points higher than where we opened 2020 but 66 basis points below where it stood two years ago. On the tax-exempt side, 2-year munis yield benchmarks at 0.90% have fallen 14 basis points this year and 10-year yields at 1.28% are down 16 basis points. The 30-year AAA general obligation bond yield is actually up 4 basis points to 2.13%. One year ago, muni yields stood at 1.57%, 1.87% and 2.55%, respectively. Two years ago, yields were between 97 and 123 basis points higher across the curve.

The municipal primary market has been quiet for two months. Some deals have fallen in to a black hole for now. Of the new and refunding issues successfully placed, the vast majority are high investment grade or insured. In the high yield sector this month, there were only a handful of deals. The South Carolina Jobs-Economic Development Authority sold $32. 6 million of non-rated revenue bonds for Avondale Senior Living. The single maturity in 2050 was priced at par to yield 4.00% and converts to 6.5% in one year. The Public Finance Authority of Wisconsin issued $24.8 million of non-rated charter school revenue bonds for the Utah Military Academy, structured with a 2030 term bond priced at 5.25% to yield 6.50%. The City of Minneapolis brought a $12.4 million BB-minus rated charter school lease revenue bond issue for KIPP North Star that included a 35-year maturity priced at 5.75% to yield 6.00%. The Michigan Finance Authority sold $7.8 million of BB rated refunding bonds for the Dr. Joseph F. Pollack Academic Center of Excellence that had a 2040 term maturity priced at par to yield 5.75%.

The lockdowns imposed as a result of the pandemic have produced financial stress on every sector of the market. Some are overpriced and some dramatically underpriced and all of this is due to lack of information. First quarter corporate earnings reports are illuminating conditions through March 31, but it will not be until late July that we will have data for damage done in April and May and June. To date, only about 350 municipal issuers and conduit borrowers within the universe of approximately 118,000 have publicly disclosed any details about how operations and expenses have been impacted. So investors are forced to speculate on the extent of illness, revenue loss, liquidity, resource needs, and aid being received from federal, state and other sources. As the month comes to a close, we encourage you to tap the many resources available to you through your HJ Sims advisor in the coming days as you explore opportunities and make informed investment decisions together.