Download Municipal Fixed Income Commentary

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Municipal Fixed
Income Commentary
Last month the discussion was how the Federal Reserve had fueled volatility as they
considered an interest rate increase, or possibly the beginning of a series of increases,
ultimately choosing to wait another period of time before “lift off.” The Federal
Open Market Committee (FOMC) highlighted global volatility in their discussion
for holding rates at generational lows after their September meeting. Speculation is
rampant over when rates might change. The rainbow of interest rate opinions ranges
from zero chance, citing similarities to Japan, to a mid-October rate change as the
economy is very close to normalization for inflation.
The global economic influence with the FOMC to hold rates at or near zero reminds
one of a flotilla of vessels traveling as a group. A group represents safety in numbers
and should a problem develop, the entire flotilla can address the problem and
continue the journey. However, there are a few negatives when choosing the flotilla
approach. If a vessel breaks down, like the leaky ship Greece, then the flotilla waits
in the harbor until repairs are complete. Once back to the journey after repairs, the
flotilla can only go as fast as the slowest ship, H.M.S. Europe. Ships U.S.A. and
China are faster right now and in better condition but chose to stay with the flotilla
instead of finding new territory, better spices and unchartered fishing waters with
plentiful game. Captain Yellen and crew have chosen to set their pace with the
slowest ship right now.
The Federal Open
Market Committee
highlighted global
volatility in their
discussion for holding
rates at generational
lows after their
September meeting.
September 30, 2015
•
FOMC highlights global
economy as reason
for rates remaining at
generational lows.
•
FOMC choosing to only
go as fast as the slowest
vessel in global flotilla.
•
Yogi Berra (1925-2015)
would have made
an interesting FOMC
participant.
•
The interest rate
increases in 1994 and
2004 don’t look like what
the FOMC has in store for
the future.
One of baseball’s greatest players, and creator
of quotable tongue in cheek sayings, or “yogiisms” passed away this month. Yogi Berra had
a knack for words and after looking at some
of these, it is possible Yogi could have been
on the Federal Open Market Committee. The
correlation with recent Fed action and some
Yogi-isms is highlighted on the next page:
“This information has been provided by Capstone Asset Management Company. All material presented is compiled from sources believed to be reliable and current,
but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in
an investment making decision. The views and opinions expressed are those of the portfolio manager at the time of publication and are subject to change. There is
no guarantee that these views will come to pass. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully
before investing. Past performance does not guarantee future results.”
Municipal Fixed Income Commentary
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“It ain’t over until it’s over.”
No doubt referring to maintaining interest rates at emergency monetary policy levels.
“You can observe a lot by just watching.”
FOMC has been doing a lot of both.
“If the world were perfect, it wouldn’t be.”
FOMC may be waiting for the perfect time to change interest rates, but it isn’t the
perfect time.
“If the world were
perfect, it wouldn’t be.”
– Yogi Berra
“It was impossible to get a conversation going, everybody was talking too much.”
FOMC conversations regarding interest rates and the global economy.
“I never said most of the things I said.”
Referring to the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal
Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a
rotating basis since 1913.
“The towels were so thick there I could hardly close my suitcase.”
FOMC meeting held at Jackson Hole, WY.
“You’ve got to be very careful if you don’t know where you are going, because you might not get there.”
FOMC reviewing economic data before choosing where to go with interest rates.
“It’s like deja vu all over again.”
FOMC minutes after each of the eight meetings annually.
“When you come to a fork in the road, take it.”
The interest rate cycle has been at zero for a long time with a rate increase fork in the road coming up, take it.
“We made too many wrong mistakes.”
FOMC tortures the data until it tells them what they want to hear.
“The future ain’t what it used to be.”
The interest rate increases in 1994 and 2004 don’t look like what the FOMC has in store for the future.
“You don’t have to swing hard to hit a home run. If you got the timing, it’ll go.”
Global economic timing is off.
“This information has been provided by Capstone Asset Management Company. All material presented is compiled from sources believed to be reliable and current,
but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in
an investment making decision. The views and opinions expressed are those of the portfolio manager at the time of publication and are subject to change. There is
no guarantee that these views will come to pass. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully
before investing. Past performance does not guarantee future results.”
Municipal Fixed Income Commentary
Let’s pretend Yogi Berra is on the Fed team as a third base coach. This game is tied
at zero (rate) and has gone into extra innings for so long that Head Coach Bernanke
has been replaced with Coach Yellen. The game has been fundamentally managed
with very little risk taken. Team Fed has managed to get a runner to third but the
bottom of the lineup is coming to bat with two outs and all the bullpen pitchers have
been used. Coach Yellen is looking at the batting statistics (data) and the lineup
shows improvement (inflation) but just average performance (economy). Coach
Yellen is playing it safe and figures better hitters will be coming to bat next inning.
Yogi Berra sees the playing field differently. There is a runner in scoring position
in a long drawn out game. Even fan Bill Gross is shouting “Get off zero. You can
win this game.” Yogi calls for a pinch hitter to come to the plate to hit from the left
side since the opposing pitcher is right handed. This pinch hitter has the opposing
team befuddled since there is little data to review. The batting average is low so the
catcher is going to call for straight pitching and strike out the batter. Yogi goes thru
his signals to the runner and pinch hitter. Confirmation signal comes back from both
runner and batter. Squeeze play. (Interest rate hike in October/December.) Coach
Yellen nearly faints in the dugout. Plate is open to the runner since Yogi switched
the batter to hit left handed. (Fed Presidents commenting on future rate hikes for
2015.)
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Let’s pretend Yogi
Berra is on the Fed
team as a third
base coach. Coach
Yellen is looking at
the batting statistics
(data) and the lineup
shows improvement
(inflation) but just
average performance
(economy).
Catcher drops one finger down and taps his right leg once. Fastball inside low.
Catcher shifts towards the batter. Pitcher winds up. Batter squares around to bunt
as the runner takes off for home as fast as possible. The play is in motion and no
stopping now. Yogi is smiling. The fans are screaming (volatility). Everyone is on
their feet. The ball is approaching the plate and...........
We will find out if the squeeze play works on October 27-28, 2015 or if we will
continue with extra innings.
“It ain’t over until it’s over.”
Capstone Asset Management Co. continues to find value in the municipal secondary
market with bonds rated A or better involved with essential services like water,
sewer, power, streets, highways, school education and general obligations. The
ideal maturities on the yield curve have moved to the 10 to 15 year range with a call
feature between 2017 and 2019. Capstone continues to hold a shorter duration than
the Barclay’s Quality Municipal Index with a focus on higher quality municipalities.
Capstone Asset Management Company continues to use municipal bond market
volatility to opportunistically manage the portfolios entrusted to us.
For more information contact:
East - Jordan Izumi
713.243.6796
Central - Robert Karisch 713.243.6732
West - Luke Lloyd
713.299.8075
Southwest - John Vivrett 713.243.6746
“This information has been provided by Capstone Asset Management Company. All material presented is compiled from sources believed to be reliable and current,
but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in
an investment making decision. The views and opinions expressed are those of the portfolio manager at the time of publication and are subject to change. There is
no guarantee that these views will come to pass. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully
before investing. Past performance does not guarantee future results.”
Capstone Asset Management Company | 3700 West Sam Houston Parkway South #250 | Houston, Texas 77042
Phone: 713.260.9000 | Toll Free: 800.262.6631 | Fax: 713.260.9050
E-mail: [email protected] | www.capstonefinancial.com