by Gayl Mileszko
Stretching our dollars at the grocery store and gas pump has been increasingly tough this year, but our central bank tells us that this challenge is transitory. We know exactly how much prices for everyday goods have risen and yet the official Department of Labor measurement shows that inflation only rose 0.3% between July and August and that prices are only 5.3% higher than they were one year ago. Main Street knows that these numbers are significantly understated, that business owners have had to raise prices and pass them along in response to wage pressures and pandemic-related supply chain disruptions. In response, consumer confidence has fallen to a six-month low. Many of us are paring some purchases and getting back to the basics while economists try to put the higher prices we are paying in context. The highest year-over-year inflation rate observed in the U.S. was 29.78% back in 1778. Since the introduction of the consumer price index in 1913, the highest rate seen was 19.66% in 1917. But that was nothing compared to conditions in Zimbabwe from March 2007 to mid-November 2008 when prices actually doubled every 24 hours. At its worst point, a hundred trillion banknote barely paid for a loaf of bread. That was the worst episode of hyperinflation ever recorded.
Would Our Stock Market Fail A Breathalyzer Test?
The financial markets periodically experience inflated prices whenever there is a scarcity of products in demand and/or an excess of cash available for investment. A Wall Street Journal opinion piece this week scanned an assortment of U.S. equity prices and concluded that our stock market would fail a breathalyzer test. Several examples of head-scratching valuations were offered and the author urged us to watch out when companies are said to be worth more than any possible reality. For instance, Joby Aviation (NYSE: JOBY) an aircraft manufacturing company that is developing an all-electric vertical take-off and landing commercial passenger craft expected to begin operating in 2024 has a market capitalization of $5.36 billion, 12% above that of Jet Blue, the 5th largest U.S. passenger carrier with a fleet of 267 that has been carrying passengers since 2000. Beyond Meat (NASDAQ: BYND) which produces pea protein burgers and sausage went public in 2019 and now has a market cap of $7.144 billion. Remarkably, it is worth more than the entire global $1.7 billion yellow pea protein market. Carvana (NYSE: CVNA) which operates an online platform for buying used cars and currently has a market cap of $53.11 billion is basically worth more than Ford Motor Company with its 118-year history. The cryptocurrency platform Coinbase (NASDAQ: COIN) at this writing is worth $51.2 billion, more than the Nasdaq itself at $32.49 billion.
Extraordinary Stock and Bond Market Valuations
The most expensive publicly traded stock on record is Berkshire Hathaway which went for an astonishing $439,000 a share on May 10. Among the most extraordinary valuations, Tesla has traded for more than 1,000 times historic earnings this year. Bitcoin takes the prize for volatility with prices zooming from $5,082 in March of 2020 to $63,530 this past April, then dropping to $29,671 in July. Aluminum prices have risen by 50 percent, and copper and tin have hit record highs due to surging demand and pandemic-related supply chain bottlenecks. But as far as asset classes go, municipal bonds are being singled out as among the most expensive. Fueled by fears of Biden Administration proposals for higher taxes, and stymied by state and local governments with little need to borrow after such a massive influx of federal aid, investors have been clawing for basic access to the meager supply of new tax-exempt bonds. So far this year according to the Securities Industry and Financial Markets Association, tax-free muni issuance has totaled only $218 billion, not nearly enough to replace the $253 billion of bonds that have matured or been called, and insufficient to meet the additional demand reflected in the $86 billion of net inflows into mutual funds and ETFs. Investors have hung on for dear life to bonds with 5% coupons and long maturities, noncallable paper, and most every past purchase made at par or discount. Secondary market trading volume by par amount is 33% below 2020 levels and 26% below 2019.
Basic Fundamental Analysis in the Hunt for Income
The analysts at HJ Sims scour the market throughout the day for value across all markets while our traders focus on creditworthy offerings in the tax-exempt and taxable sectors. We cannot underestimate the critical need for fundamental analysis in an investment climate rife with “fad investing” and skewed risk-reward ratios. The careful study of the broader economy along with detailed financial statements and other measurements of intrinsic value including management quality, ratings, competition, regulatory environment, and industry trends are essential to long-term investing. We use this basic approach to find higher yielding gems every day for our clients as institutions sell to make room for new holdings, estates liquidate, and investors look to book gains or losses before the year-end rush. Our public finance bankers work with non-profit borrowers to bring to market new and refunding issues that bring down their debt service costs while offering to diversify their base of bondholders to include a solid mix of individual and institutional buyers. In turn, these buyers enjoy access to unique credits, structures, yields, terms, and sector and geographic diversity.
Last Week in the Bond Markets
In municipal bond trading sessions last week, shortened by the Labor Day holiday, State of California general obligation bonds traded at prices in excess of $169.71. Taxable North Texas Tollway Build America Bonds traded over $167.98. New Jersey Turnpike revenue bonds sold at levels over $165.86 and New York Metropolitan Transportation Authority bonds were snapped up at $165.14. In the primary market, the Washington Housing Finance Commission sold $91.9 million of non-rated revenue and refunding bonds for eliseo Retirement Community in Tacoma, structured with a 2057 maturity priced at $102.80 to yield 3.64%. We saw a few high yield deals priced at par, including the Chester County Economic Development Authority’s $47 million issue of non-rated bonds for Friends Chester Community Charter School that had a 2048 maturity priced to yield 5.625%, and the California Municipal Finance Authority’s $16.2 million BB rated refunding for Albert Einstein Academies that included a 2043 term bond priced at 4.50%. We also saw a rare discount in the Florida Development Finance Corporation’s issue of $16.6 million of 2056 bonds for the non-rated Navigator Academy of Leadership Davenport priced at $95 to yield 6.097%. So, even in this market, there are still new bonds coming with real yield for qualified investors who have advisors like ours at HJ Sims who diligently review the feasibility studies, analyze the fundamental data, assess risk and ascertain suitability.
This Week in the Financial Markets
This week, HJ Sims underwrote a $53.5 million BBB-minus rated refunding for Landis Homes Retirement Community in Lititz, Pennsylvania. The bonds are being issued through the Lancaster Industrial Development Authority and feature prominently on the $12 billion municipal bond calendar. Also in the senior living sector is a $120 million A-minus rated financing for the California obligated group of Human Good. On the high yield slate is a $36 million non-rated social bond Build NYC deal for Integration Charter Schools, a $21.9 million refunding for BB rated Summit Academy North, a $10 million non-rated Idaho deal for Meridian South Charter School, a $15 million non-rated PFA taxable refunding for Estancia Valley Classical Academy, and a $9 million non-rated Utah sale for St George Academy. The investment grade corporate bond slate is estimated at $35 to $40 billion, only half as large as last week’s 54-deal line-up that totaled $77 billion. Among the $5 billion of high yield corporate bond deals coming to market is a $1.5 billion debut for Coinbase.
Financial markets are gearing up for next week’s Federal Open Market Committee meeting, where a discussion of reducing monthly Treasury and mortgage-backed securities purchases is expected. In the meantime, traders face an economic calendar that includes updates on manufacturing, jobless claims, consumer sentiment and a high-profile retail sales report. There is a dynamic list of potential market movers. North Korea is testing new long-range cruise missile. Russia is conducting week-long war games with Belarus. Regulators in China are rattling the technology sector. There was the California recall vote Tuesday and ongoing furor over the Administration’s withdrawal from Afghanistan. Wall Street is keeping a closer eye than usual on Capitol Hill as legislators return from recess to address both urgent and self-imposed deadlines for funding the government, lifting the debt limit, and debating issues linked to the infrastructure and reconciliation bills. Higher corporate, individual and excise taxes are on the table.
By the Numbers
As we go to press, the 2-year Treasury yield stands at 0.20%, the 10-year at 1.28% and the 30-year at 1.85%. The 10-year Baa corporate bond yields 2.88%. The 2-year AAA rated municipal general obligation bond benchmark yield is 0.11%, the 10-year is at 0.93% and the 30-year at 1.53%. The 10-year muni/Treasury ratio is 72.8% and the 30-year ratio is 82.7%. The VIX Index reads 19.46. In the past week, all the stock indices have fallen: the Dow is at 34,577, the S&P at 4,443, the Nasdaq at 15,037 and the Russell 2000 at 2,209. Oil prices have risen to $70.46 a barrel, gold is at $1,803 an ounce, and Bitcoin is worth $46,610.
We encourage you to reach out to your HJ Sims representative for guidance in reviewing your portfolio.