Morning Market Thoughts

Good morning. We’re looking at a slightly lower open today. After six days of advances, it’s definitely time for stocks to take a breather.

Last night I saw an interview of President Trump wherein he said that the Puerto Rican bonds held by Wall Street was going to have to be wiped out. That was a bit shocking to hear, though probably not unexpected by those who have been following Puerto Rico’s debt issues. Puerto Rico has been broken for years, with corruption almost being a way of life for many public officials and private enterprises. Prior to the recent visit by Hurricane Maria, Puerto Rico was already in bankruptcy court, waging a fight with bondholders about the amount of debt that would be erased. If President Trump has just revealed the future, the bankruptcy proceedings might get a lot easier. “See this debt? Watch closely. Wait for it…wait for it…wait for it…. Are you ready?…Boom! It’s gone! And now for my next magical trick….”

While it’s easy to generalize about the debt being owned by “Wall Street”, the generalization ignores the obvious fact that “Wall Street” is actually comprised of a bunch of folks who are managing the money of any mutual fund investor. You probably know some of them — you see them when you’re going out to the mailbox to get your mail. They’re your neighbors.

The fact is that 20% of US bond funds own Puerto Rico’s debt (recent estimates are $73 billion). Some of the biggest holders include mutual funds run by OppenheimerFunds, Franklin Templeton, Goldman Sachs (GS), BlackRock (BLK) and T. Rowe Price. In total, more than 850 mutual funds own Puerto Rico’s debt. So, while those names might sound like “Wall Street”, the money they manage has been invested by Main Street. Many IRA’s and pension funds own Puerto Rico’s debt because of the tantalizing high yield due to the fact that buying Puerto Rico’s debt has essentially been a “hard money” loan (i.e., might be hard to get your money back). Most of the bonds are general obligation bonds that are triple tax exempt (no federal, state or local taxes on income).

I don’t see an opportunity to trade on the revelation that the current debt will likely be wiped out because investors were already in negotiations to take a haircut on the amount of money that would be repaid, and the initial reports of the damage caused by Rita put everyone on notice that they were unlikely to get anything out of this deeply indebted U.S. territory. The massive damage sustained by the millions of residents of Puerto Rico has been just breathtaking, and my heart goes out to all who have been impacted. The rebuilding process will take many years.

On a relatively happier note, we could be getting some movement this afternoon when Janet Yellen speaks at a conference this afternoon. As you probably know, there is speculation that her status as Fed Chair may be coming to an end. (I can almost hear the QE demons saying, “Next!”). It’s hard to know which way traders would lean if she does give some indication that she is a short-timer. Just thought I’d mention it.

Are you coming this weekend?

I’ll be in New York this weekend for our annual picnic in Central Park. We missed last year, but are back on track for Saturday. I’m looking forward to hanging out with anyone who wants to stop by. I’ve known several of our members for more than 10 years, so it will be nice to get together with some old friends.

Meanwhile, I’ll see you in the forum.


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